RELIABLE.DURABLE.GROWING.
2018 ANNUAL REPORT
Management's Discussion and Analysis
CT REIT
Fourth Quarter and Full Year 2018
TABLE OF CONTENTS
Forward-looking Disclaimer
1.0
Preface
1.1
1.2
1.3
1.4
1.5
1.6
1.7
2.0
3.0
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Basis of Presentation
Definitions
Accounting Estimates and Assumptions
Quarterly and Annual Comparisons in this MD&A
Key Operating Performance Measures and Additional Non-GAAP Measures
Review and Approval by the Board of Trustees
Nature and Formation
Growth Strategy and Objectives
Summary of Selected Financial and Operational Information
Overview of the Property Portfolio
Property Profile
Revenue by Region
Six Largest Urban Markets
Fair Value of Property Portfolio
2018 Investment Activites
Development Activities
Investment and Development Funding
Lease Maturities
Top 10 Tenants Excluding CTC Banners
Leasing Activities
Recoverable Capital Costs
5.0
Results of Operations
5.1
5.2
Financial Results for the Three Months and Year Ended December 31, 2018
Non-GAAP Measures
6.0
Liquidity and Financial Condition
6.1
6.2
6.3
6.4
6.5
Liquidity
Discussion of Cash Flows
Credit Ratings
Debt and Capital Structure
Interest Coverage Ratio
3
4
4
4
4
4
5
5
5
6
7
8
8
10
10
11
12
14
15
16
18
18
18
19
19
23
25
25
25
26
26
29
CT REIT 2018 ANNUAL REPORT 1
TABLE OF CONTENTS (continued)
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
Indebtedness Ratio
Class C LP Units
Debentures
Mortgages Payable
Credit Facilities
Capital Strategy
Commitments and Contingencies
Base Shelf Prospectus
7.0
Equity
7.1
7.2
7.3
7.4
8.0
9.0
9.1
9.2
9.3
Authorized Capital and Outstanding Units
Equity
Distributions
Book Value Per Unit
Related Party Transactions
Accounting Policies and Estimates
Significant Areas of Estimation
Standards, Amendments and Interpretations Issued and Adopted
Standards, Amendments and Interpretations Issued but Not Yet Adopted
10.0
Non-GAAP Measures
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Net Operating Income
Funds From Operations and Adjusted Funds From Operations
AFFO Payout Ratio
Diluted Non-GAAP per Unit Calculations
Adjusted Cash Flow From Operations
Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments
Selected Quarterly Consolidated Information
11.0
Enterprise Risk Management
12.0
Internal Controls and Procedures
12.1
12.2
12.3
Disclosure Controls and Procedures
Internal Control Over Financial Reporting
Changes in Internal Control Over Financial Reporting
13.0
Forward-looking Information
2 CT REIT 2018 ANNUAL REPORT
29
30
31
32
32
33
33
34
34
34
36
36
38
38
40
40
40
41
43
43
44
47
47
47
48
49
49
52
52
53
53
54
MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-looking Disclaimer
This Management’s Discussion and Analysis (“MD&A”) contains statements that are forward-looking. Actual results or events may
differ materially from those forecasted in this disclosure because of the risks and uncertainties associated with the business of
CT Real Estate Investment Trust and its subsidiaries, (referred to herein as "CT REIT", "Trust" or "REIT", unless the context requires
otherwise), and the general economic environment. CT REIT cannot provide any assurance that any forecasted financial or
operational performance will actually be achieved or, if achieved, that it will result in an increase in the price of CT REIT’s units.
See section 13.0 in this MD&A for a more detailed discussion of the REIT’s use of forward-looking statements.
CT REIT 2018 ANNUAL REPORT 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
1.0 Preface
1.1 Basis of Presentation
The following MD&A is intended to provide readers with an assessment of the performance of CT REIT® for the year ended
December 31, 2018 (also referred to as "2018") and should be read in conjunction with the REIT’s audited consolidated financial
statements (“consolidated financial statements”) and accompanying notes for 2018 which have been prepared in accordance with
International Financial Reporting Standards (“IFRS”). In addition, the following MD&A should be read in conjunction with CT
REIT’s forward-looking information found in section 13.0 of this MD&A. Information about CT REIT, including the Annual Information
Form (“AIF”) and all other continuous disclosure documents required by the Canadian securities regulators, can be found on the
System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com or CT REIT’s website at
www.ctreit.com.
1.2 Definitions
In this document, the terms “CT REIT”, “REIT” and “Trust” refer to CT Real Estate Investment Trust® and its subsidiaries unless
the context requires otherwise. In addition, “Company”, “CTC” and “Corporation” refer to Canadian Tire Corporation, Limited, entities
that it controls and their collective businesses unless the context requires otherwise.
In this document, the term “Development Properties” means those Properties being developed or redeveloped, but excludes
Properties undergoing intensification activities, consisting of the construction of additional buildings on existing assets and
modifications to existing buildings, as well as the redevelopment of mixed-use properties; and “Properties Under Development”
means that portion of any (i) Development Property, (ii) Properties undergoing intensification activities, consisting of the construction
of additional buildings on existing assets and modifications to existing buildings, and (iii) mixed use properties being developed
or redeveloped.
This document contains certain trade-marks and trade names of CTC and is the property of CTC. Solely for convenience, the
trade-marks and trade names referred to herein may appear without the ® or ™ symbol.
1.3 Accounting Estimates and Assumptions
The preparation of the consolidated financial statements in accordance with IFRS requires management to make judgments and
estimates that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Refer to section 9.0 in this MD&A for further information.
Financial data included in this MD&A includes material information as of February 11, 2019. Disclosure contained in this document
is current to that date, unless otherwise noted.
1.4 Quarterly and Annual Comparisons in this MD&A
Unless otherwise indicated, all comparisons of results for Q4 2018 (three months ended December 31, 2018) are against results
for Q4 2017 (three months ended December 31, 2017) and comparisons of results for the year ended 2018 are against results for
the year ended 2017.
4 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
All amounts in this MD&A are in thousands of Canadian dollars, except per unit, unit, square foot amounts or unless otherwise
indicated. Rounded numbers are used in this MD&A and, as such, totals may not add up to 100 percent.
1.5 Key Operating Performance Measures and Additional Non-GAAP Measures
The key operating performance measures used by management may not be comparable to similar measures presented by other
real estate investment trusts or enterprises. Net income prepared in accordance with IFRS is also subject to varying degrees of
judgment, and some meaningful differences in accounting policies exist between publicly traded entities in Canada. Accordingly,
net income as presented by CT REIT may not be comparable to net income presented by other real estate investment trusts or
enterprises.
Net operating income (“NOI”), same store NOI, same property NOI, funds from operations (“FFO”), FFO per unit - basic, FFO
per unit - diluted, adjusted funds from operations (“AFFO”), AFFO per unit - basic, AFFO per unit - diluted, AFFO payout ratio,
adjusted cashflow from operations ("ACFO") and earnings before interest and other financing costs, taxes and fair value adjustments
(“EBITFV”) are measures used by management to track and assess CT REIT’s performance in meeting its principle objective of
creating Unitholder value (collectively referred to as "non-GAAP measures"). These non-GAAP measures are not defined by
IFRS, also referred to as generally accepted accounting principles ("GAAP"), and therefore should not be construed as alternatives
to net income or cash flow from operating activities calculated in accordance with IFRS.
For further information on the non-GAAP measures used by management and for reconciliations to the nearest GAAP measures,
refer to section 10.0.
1.6 Review and Approval by the Board of Trustees
The Board of Trustees (the "Board”), on the recommendation of its Audit Committee, approved for issuance this MD&A on
February 11, 2019.
1.7 Nature and Formation
CT REIT is an unincorporated, closed-end real estate investment trust established on July 15, 2013 pursuant to a declaration of
trust under, and governed by, the laws of the Province of Ontario as amended and restated as at October 22, 2013 (the “Declaration
of Trust”). CT REIT commenced operations on October 23, 2013. The principal, registered and head office of CT REIT is located
at 2180 Yonge Street, Toronto, Ontario M4P 2V8. CTC owned a 76.2% effective interest in CT REIT as of December 31, 2018,
consisting of 44,519,508 of the issued and outstanding units of CT REIT (“Units”) and all of the issued and outstanding Class B
limited partnership units (“Class B LP Units”) of CT REIT Limited Partnership (the “Partnership”), which are economically equivalent
to and exchangeable for Units. The holders of Units and Class B LP Units are collectively referred to as "Unitholders". CTC also
owns all of the Class C limited partnership units (“Class C LP Units”) of the Partnership. The Units are listed on the Toronto Stock
Exchange (“TSX”) under the symbol CRT.UN.
CT REIT has one segment for financial reporting purposes which comprises the ownership and operation of primarily retail
investment properties located across Canada.
CT REIT 2018 ANNUAL REPORT 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
2.0 GROWTH STRATEGY AND OBJECTIVES
The following section contains forward-looking information and readers are cautioned that actual results may vary.
The principal objective of CT REIT is to create Unitholder value over the long-term by generating reliable, durable and growing
monthly distributions on a tax-efficient basis. To achieve this objective, management is focused on expanding the REIT’s asset
base while also increasing its AFFO1 per unit.
Future growth is expected to continue to be achieved from a number of sources including:
1. The portfolio of Canadian Tire store leases generally contains contractual rent escalations of approximately 1.5% per
year, on average, over the initial term of the leases and have a weighted average remaining lease term of 10.7 years;
2. CT REIT has contractual arrangements with CTC whereby CT REIT has a right of first offer2 (“ROFO”) on all CTC
properties which meet the REIT’s investment criteria and preferential rights, subject to certain exceptions, to participate
in the development of, and to acquire, certain new retail properties; and
3. CT REIT will continue to seek to use its relationship with CTC to obtain insights into potential real estate acquisitions
and development opportunities in markets across Canada.
1 Non-GAAP measure. Refer to section 10.0 for further information.
2 The ROFO Agreement shall continue in effect until the later of October 2023 and such time as CTC ceases to hold a majority of the voting units, being the Units and Special
Voting Units (as defined in section 7.0).
6 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
3.0 SUMMARY OF SELECTED FINANCIAL AND OPERATIONAL INFORMATION
Readers are reminded that certain key performance measures may not have standardized meanings under GAAP. For further
information on the REIT’s operating measures and non-GAAP measures, refer to sections 1.0 and 10.0.
(in thousands of Canadian dollars, except unit, per unit and square footage amounts)
For the periods ended December 31,
Property revenue
Income before interest and other financing charges, taxes and fair value adjustments 1
Net operating income 1
Net income
Net income per unit (basic) 2
Net income per unit (diluted) 4
Funds from operations 1
FFO per unit (diluted, non-GAAP) 1,2,3
Adjusted funds from operations 1
AFFO per unit (diluted, non-GAAP) 1,2,3
Distributions per unit - paid 2
AFFO payout ratio 1
Excess of AFFO 1 over distributions:
Cash retained from operations before distribution reinvestment 6
Per unit (diluted, non-GAAP) 2,3,6
Cash generated from operating activities
Adjusted cashflow from operations 1
Weighted average number of units outstanding 2
Basic
Diluted 4
Diluted (non-GAAP) 1,3
Period-end units outstanding 2
Total assets
Total indebtedness
Book value per unit 2
Market price per Unit - Close (end of period)
OTHER DATA
Weighted average interest rate 7
Indebtedness ratio
Interest coverage (times)
Weighted average term to debt maturity (in years) 7
Gross leasable area (square feet) 5
Occupancy rate 5,8
1 Non-GAAP measure. Refer to section 10.0 for further information.
2 Total units means Units and Class B LP Units outstanding.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
472,483
351,876
345,505
300,906
1.401
1.098
246,032
1.144
205,173
0.954
0.728
76%
48,845
0.227
331,722
206,056
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Year Ended
2017
443,303
334,193
322,253
317,277
1.501
1.232
237,617
1.124
194,371
0.919
0.700
76%
46,795
0.221
317,154
195,723
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2016
407,165
300,275
287,089
259,079
1.293
1.079
214,877
1.071
172,794
0.862
0.680
79%
37,449
0.187
275,584
176,355
214,805,646
211,310,245
200,439,916
336,142,459
313,338,770
307,219,806
215,040,074
211,456,486
200,558,552
220,249,239
213,738,161
206,846,799
5,708,692
2,573,489
14.01
11.53
$
$
$
$
5,455,398
2,544,972
13.39
14.50
$
$
$
$
5,014,601
2,383,123
12.52
15.00
4.08%
45.1%
3.36
9.0
4.08%
46.7%
3.46
10.0
4.06%
47.5%
3.49
10.6
26,537,359
25,849,773
24,659,316
98.7%
98.6%
99.7%
3 Diluted units used in calculating non-GAAP measures include restricted and deferred units issued under various plans and exclude the effect of assuming that all
of the Class C LP Units will be settled with Class B LP Units. Refer to section 7.0.
4 Diluted units determined in accordance with IFRS includes restricted and deferred units issued under various plans and the effect of assuming that all of the
Class C LP Units will be settled with Class B LP Units. Refer to section 7.0.
5 Refers to retail, mixed-use commercial and distribution centre properties and excludes Properties Under Development.
6 Refer to section 7.0 for further information.
7 Excludes the credit facilities.
8 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted
on or before December 31, 2018, December 31, 2017 and December 31, 2016.
CT REIT 2018 ANNUAL REPORT 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
4.0 OVERVIEW OF THE PROPERTY PORTFOLIO
4.1 Property Profile
The property portfolio as at December 31, 2018 consists of 326 retail properties, four distribution centres ("DC"), one mixed-use
commercial property and 11 Development Properties (collectively, the "Properties"). The Properties are located in each of the
provinces and in two territories across Canada. The properties, DCs and mixed-use commercial property contain approximately
26.5 million square feet of gross leasable area (“GLA”).
CT REIT’s consolidated financial position, results of operations and property portfolio analyses include the REIT’s one-third interest
in Canada Square, a mixed-use commercial property in Toronto, Ontario. CTC is CT REIT’s most significant tenant. At December 31,
2018, CTC represented 94.4% of total GLA (December 31, 2017 - 95.3%) and 92.7% of annualized base minimum rent
(December 31, 2017 - 93.2%).
CT REIT's property portfolio's occupancy, excluding Properties Under Development, is as follows:
(in square feet)
Property Type
Canadian Tire stores
Distribution centres
Mixed-use property
Third party tenants
Other CTC Banners 1
Total
As at December 31, 2018
GLA
Occupied
GLA Occupancy rate 2
20,359,163
20,359,163
3,914,871
3,713,456
280,386
273,044
1,434,622
1,308,013
548,317
548,317
26,537,359
26,201,993
100%
94.9%
97.4%
91.2%
100%
98.7%
1 May include Mark’s and L’Équipeur, SportChek, Sports Experts, Atmosphere, and Canadian Tire Bank (referred to herein as "Other CTC Banners").
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on
or before December 31, 2018.
(in square feet)
Property Type
Canadian Tire stores
Distribution centres
Mixed-use property
Third party tenants
Other CTC Banners 1
Total
1 May include Other CTC Banners.
As at December 31, 2017
GLA
Occupied
GLA Occupancy rate 2
20,016,117
20,016,117
3,914,871
3,682,834
281,280
274,921
1,189,102
1,074,854
448,403
448,403
25,849,773
25,497,129
100%
94.1%
97.7%
90.4%
100%
98.6%
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on
or before December 31, 2017.
8 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The REIT's property portfolio consists of:
As at
Canadian Tire single tenant properties
Other single tenant properties
Multi-tenant properties anchored by Canadian Tire store
Multi-tenant properties not anchored by Canadian Tire store
Distribution centres
Mixed-use property
Total operating properties
Development Properties
Total properties
December 31, 2018 December 31, 2017 ¹
255
13
52
6
4
1
331
11
342
254
12
49
4
4
1
324
7
331
1Included in the Canadian Tire single tenant properties is one income-producing property subject to a ground lease.
As at
Gas bars at retail properties
December 31, 2018
December 31, 2017
106
99
CT REIT’s Properties by region, as a percentage of total GLA as at December 31, 2018 are as follows:
1 Excluding Properties Under Development.
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease
agreements contracted on or before December 31, 2018.
CT REIT 2018 ANNUAL REPORT 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
4.2 Revenue by Region
CT REIT’s properties are located across Canada with approximately 66% of annualized base minimum rent in respect of properties
in Ontario and Quebec.
1 Excluding Properties Under Development.
2 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease
agreements contracted on or before December 31, 2018.
4.3 Six Largest Urban Markets
A significant portion of CT REIT’s Properties, excluding Properties Under Development, are located in the following six largest
urban markets:
As at
Vancouver
Edmonton
Calgary
Toronto
Ottawa
Montreal
Percentage of Annualized Base Minimum Rent 1
December 31, 2018
December 31, 2017
3.3%
4.0%
2.4%
21.7%
4.2%
11.6%
47.2%
3.3%
4.1%
2.4%
22.5%
4.3%
11.9%
48.5%
1 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on
or before December 31, 2018 and December 31, 2017.
10 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
4.4 Fair Value of Property Portfolio
The fair value of the Properties represents 99.8% of the total assets of CT REIT as at December 31, 2018.
(in thousands of Canadian dollars)
December 31, 2018
December 31, 2017
Income-
producing
properties
Properties
Under
Development
Total
investment
properties
Income-
producing
properties
Properties
Under
Development
Total
investment
properties
Balance, beginning of period
$
5,337,515 $
99,082 $
5,436,597 $
4,979,231 $
21,124 $
5,000,355
Property acquisitions (including transaction
costs)
89,429
Intensifications
Developments
Development land
Capitalized interest and property taxes
—
—
—
—
—
18,625
47,079
12,642
2,752
89,429
18,625
47,079
12,642
2,752
209,677
—
209,677
—
—
—
—
24,893
64,882
13,380
1,957
Transfers
52,947
(52,947)
—
27,154
(27,154)
Fair value adjustment on investment
properties
Straight-line rent
Recoverable capital expenditures
Dispositions
53,628
18,404
17,699
(661)
—
—
—
—
53,628
18,404
17,699
79,687
22,822
18,962
(661)
(18)
—
—
—
—
24,893
64,882
13,380
1,957
—
79,687
22,822
18,962
(18)
Balance, end of period 1
$
5,568,961 $
127,233 $
5,696,194 $
5,337,515 $
99,082 $
5,436,597
1 Includes purchased lands for $13,911 (December 31, 2017 - $9,209) held for development.
As at December 31, 2018, management’s determination of fair value was updated for current market assumptions, informed by
market capitalization rates provided by independent appraisal professionals.
CT REIT had obtained independent appraisals such that substantially all of its properties were externally appraised over a four-
year period. CT REIT modified its use of independent appraisals in Q4 2018. The scope of properties subject to external appraisals
over the four year cycle changed from 100% to approximately 80% of the portfolio's IFRS fair value by excluding any single tenant
asset that has a fair value, in management’s estimation, below a certain threshold.
Valuations determined by the overall capitalization rate ("OCR") method are most sensitive to changes in capitalization rates.
Valuations determined by the discounted cash flow ("DCF") method are most sensitive to changes in discount rates.
The significant inputs used to determine the fair value of CT REIT’s income-producing properties are as follows:
Number of properties
Value at December 31, 2018
Discount rate
Terminal capitalization rate
Overall capitalization rate
Hold period (years)
Properties valued by
the OCR method
Properties valued by
the DCF method
280
62
$
4,149,740
$
1,546,453
—%
—%
6.17%
—
6.95%
6.54%
—%
10
CT REIT 2018 ANNUAL REPORT 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes the sensitivity of the fair value of income-producing properties to changes in the capitalization
rate and discount rate, respectively:
Rate sensitivity
+ 75 basis points
+ 50 basis points
+ 25 basis points
December 31, 2018
- 25 basis points
- 50 basis points
- 75 basis points
OCR Sensitivity
Change in fair
value
Fair value
DCF Sensitivity
Change in fair
value
Fair value
$
$
$
3,712,280 $
(437,460) $
1,398,562 $
3,846,909
3,992,329
(302,831)
(157,411)
1,444,392
1,493,710
4,149,740 $
— $
1,546,453 $
4,320,812
4,507,235
171,072
357,495
1,604,561
1,667,187
4,711,459 $
561,719 $
1,735,399 $
(147,891)
(102,061)
(52,743)
—
58,107
120,734
188,946
Included in CT REIT's portfolio are 10 properties which are situated on ground leases with remaining initial terms of up to year to
37 years, and an average remaining initial term of 14 years. Assuming all extensions are exercised, the ground leases have
remaining terms between up to and 72 years with an average remaining lease term of 37 years.
4.5 2018 Investment Activities
The following table presents income-producing properties acquired, intensified, developed, or redeveloped during the year ended
December 31, 2018.
(in thousands of Canadian dollars, except for GLA amounts)
Transaction
date
GLA
Total
investment cost
Property Location
St. Catharines, ON 1
Collingwood, ON 1
La Sarre, QC 2,4,5
Amos, QC 3,6
Listowel, ON 2
Gananoque, ON 1,6
Picton, ON 1,2
Belleville, ON 1,6
Saint-Hyacinthe, QC 1,4
St. Thomas, ON 2
Sudbury, ON 5
Winkler, MB 2
Miscellaneous free standing buildings
Total
1 Acquisition of income-producing property.
2 Intensification of an existing income-producing property.
3 Development property.
4 Land lease.
5 Redevelopment property.
February 2018
February 2018
March 2018
April 2018
May 2018
July 2018
July 2018
July 2018
November 2018
December 2018
December 2018
December 2018
December 2018
144,268
207,033
—
48,572
16,718
28,930
34,850
86,756
—
2,500
83,130
23,533
5,150
681,440 $
142,376
6 Property includes a Canadian Tire building lease and a Canadian Tire Gas+ gas bar on a land lease.
In Q4 2018, CT REIT completed the acquisition of a Canadian Tire Gas+ gas bar, subject to a ground lease with CTC, from a third
party, in Saint-Hyacinthe, Quebec. The REIT also completed the intensification of existing Canadian Tire stores in St. Thomas,
Ontario and Winkler, Manitoba, as well as the redevelopment of a redundant Canadian Tire store previously acquired in Sudbury,
Ontario.
12 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
In Q3 2018, CT REIT completed the acquisition of two properties, from CTC, both leased for a Canadian Tire store and a Canadian
Tire Gas+ gas bar, in Belleville and Gananoque, Ontario. The REIT also completed the acquisition, from CTC, of a redeveloped
Canadian Tire store, located on a ground lease previously acquired by CT REIT, in Picton, Ontario.
In Q2 2018, CT REIT completed the intensification of an existing Canadian Tire store in Listowel, Ontario and the development of
a Canadian Tire store and Canadian Tire Gas+ gas bar in Amos, Quebec.
In Q1 2018, CT REIT completed the acquisition, from a third party, of two multi-tenant properties anchored by existing Canadian
Tire tenancies located in Collingwood and St. Catharines, Ontario and the redevelopment of an existing Canadian Tire Gas+ gas
bar in La Sarre, Quebec.
In addition, during 2018, CT REIT completed the development of two free standing buildings comprised of 5,150 square feet of
GLA and three land leases. The developments occurred at CT REIT’s existing retail properties in Ancaster, Dunnville and
Waterloo, Ontario and Swift Current, Saskatchewan. These new retail units are a mix of third party and Canadian Tire
Corporation Gas+ gas bar/carwash tenancies.
Subsequent to December 31, 2018 CT REIT completed the acquisition of a single tenant property with a Canadian Tire store
located in Canmore, Alberta from a third party, for $19,925 that has not been included in the table above.
CT REIT 2018 ANNUAL REPORT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following section contains forward-looking information and readers are cautioned that actual results may vary.
4.6 Development Activities
The following table provides details of the REIT's development activities as at December 31, 2018. The total building area represents
the maximum anticipated area of the developments. The "Not committed to lease" column includes areas which may be under
construction but not committed to lease. The "Committed additional investment" column represents the approximate financial
commitment required to complete the "Committed to lease" areas and related site works.
Building area
(in square feet)
Total investment
(in thousands of Canadian dollars)
Incurred
to-date 9
Total
Committed
additional
investment 9
Property 1
Toronto (Leslie Lakeshore), ON 2
Calgary, AB 2
Huntsville, ON 3
Mt. Forest, ON 4
Grand Falls-Windsor, NL 4
Sherwood Park North, AB 4
Grande Prairie, AB 4
Antigonish, NS 6
Altholville, NB 3
Hamilton Rymal, ON 3,5
Val-d'Or, QC 3,8
Anticipated date
of completion
Committed
to lease
Not
committed
to lease
Q1 2019
Q1 2019
Q2 2019
Q2 2019
Q2 2019
20,000
47,000
10,000
34,000
65,000
Q2 2019
120,000
Q2 2019
149,000
—
—
—
—
—
—
—
Total
20,000
47,000
10,000
34,000
65,000
120,000
149,000
Q2 2019
165,000
14,000
179,000
Q4 2019
Q4 2019
Q4 2019
21,000
—
26,000
—
—
—
21,000
—
26,000
Fort St. John, BC - Phase 1 4
Q4 2019
144,000
10,000
154,000
Bradford, ON 3
Kincardine, ON 3
Midland, ON 3
Rouyn-Noranda, QC 3
Q4 2019
Q2 2020
Q2 2020
Q2 2020
20,000
29,000
31,000
10,000
Orillia, ON - Phase 1/Phase 2 2
Q2 2020/Q4 2022
250,000
Niagara Falls, ON 2
Yarmouth, NS 3,8
Calgary, AB 7
Toronto (Canada Square), ON 6
TOTAL
Q2 2020
213,000
Q2 2020
23,000
TBD
TBD
TBD
TBD
—
—
—
—
71,000
11,000
—
TBD
TBD
20,000
29,000
31,000
10,000
321,000
224,000
23,000
TBD
TBD
1,377,000
106,000
1,483,000 $
127,233 $
129,163 $ 256,396
1 Properties Under Development under 5,000 square feet are not included.
2 Redevelopment property.
3 Intensification of an existing income-producing property.
4 Development property.
5 Land lease.
6 Redevelopment property. Potential building area and investment costs to be determined ("TBD").
7 Development land. Potential building area and investment costs to be determined ("TBD").
8 Acquired, or to be acquired development land for the intensification of an existing income-producing property.
9 Includes amounts related to projects in early stages of development.
14 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
As at December 31, 2018, CT REIT had committed lease agreements for 1,377,000 square feet, of which 95.3% has been leased
to CTC. A total of $127,233 has been expended to date on the developments described above, and CT REIT anticipates investing
an additional $129,163 to complete the committed developments. Included in the commitment is $123,057 due to CTC. These
commitments exclude the development activities at the Toronto (Canada Square), Ontario and Calgary, Alberta properties.
In Q4 2018, CT REIT completed the acquisition of a multi-tenant redevelopment property from a third party in Niagara Falls,
Ontario. The REIT expects to redevelop an existing vacancy into a 134,000 square foot Canadian Tire store by Q2 2020. The
REIT also completed the acquisition of development lands adjoining an existing property in Yarmouth, Nova Scotia for the expansion
of an existing Canadian Tire store which is expected to be completed by Q2 2020.
In Q3 2018, CT REIT completed the acquisition of a development property in Grande Prairie, Alberta, from CTC. The REIT
expects to construct a 149,000 square foot Canadian Tire store by Q2 2019. CT REIT also completed the acquisition of development
lands in Fort St. John, British Columbia, from CTC, for a multi-phased development project which includes the construction of a
126,000 square foot Canadian Tire store by Q2 2020 and the acquisition of development lands adjoining an existing property from
a third party in Val-d'Or, Quebec, for the expansion of an existing Canadian Tire store which is expected to be completed by Q4
2019.
In Q2 2018, CT REIT completed the acquisition of development lands from CTC, in Mount Forest, Ontario. The REIT expects to
construct a 34,000 square foot Canadian Tire store on the lands by Q2 2019.
In Q1 2018, CT REIT completed the acquisition of development lands from a third party, in Grand Falls-Windsor, Newfoundland.
The REIT expects to construct a 65,000 square foot Canadian Tire store on the land by Q2 2019.
4.7 Investment and Development Funding
Funding of investment and development activities for the three months and year ended December 31, 2018 was as follows:
(in thousands of Canadian dollars)
Funded with working capital to CTC
Funded with working capital to third parties 1
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Total costs
$
$
1 Includes $1,130 for the construction of Other CTC Banner stores.
Q4 2018 Investment and Development Activity
Property
investments
Development
land Developments Intensifications
— $
1,640
—
—
— $
6,004 $
48
—
—
12,836
644
—
4,706 $
2,695
—
—
Total
10,710
17,219
644
—
1,640 $
48 $
19,484 $
7,401 $
28,573
CT REIT 2018 ANNUAL REPORT 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
(in thousands of Canadian dollars)
Funded with working capital to CTC
Funded with working capital to third parties 1
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Total costs
$
$
1 Includes $4,784 for the construction of Other CTC Banner stores.
YTD 2018 Investment and Development Activity
Property
investments
Development
land Developments Intensifications
7,258 $
8,546 $
30,155 $
68,181
—
13,990
4,096
—
—
16,860
2,752
64
8,890 $
9,735
—
—
Total
54,849
98,872
2,752
14,054
89,429 $
12,642 $
49,831 $
18,625 $
170,527
Funding of investment and development activities for the year ended December 31, 2017 was as follows:
2017 Investment and Development Activity
Total
66,516
61,706
126,000
1,957
52,610
6,000
Funded with working capital to CTC
$
28,800 $
6,640 $
14,623 $
16,453 $
Property
investments
Development
land
Developments
Intensifications
Funded with working capital to third parties 1
Funded with Bridge Facility
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Mortgages payable
Total costs
40,907
102,382
—
37,588
—
4,980
—
—
1,760
—
7,566
23,618
1,957
13,075
6,000
8,253
—
—
187
—
$
209,677 $
13,380 $
66,839 $
24,893 $
314,789
1Includes $1,839 for the construction of Other CTC Banner stores.
4.8 Lease Maturities
CTC is CT REIT's most significant tenant. As at December 31, 2018, CTC, including Canadian Tire stores and Other CTC Banners,
has leased 24.7 million square feet of GLA, with approximately 85.1% and 14.9% of the GLA attributable to retail and office, and
DC properties, respectively. The weighted average term of the retail leases with CTC, including Canadian Tire stores and Other
CTC Banners, was 10.6 years, excluding the exercise of any renewal options. The weighted average term of the Canadian Tire
store leases was 10.7 years, with a weighted average rental rate of $13.62 per square foot. The weighted average lease term for
CTC DCs was 14.9 years. The weighted average lease term of all leases in the REIT's portfolio, excluding Properties Under
Development, was 10.5 years.
16 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following graph presents the lease maturity profile from 2019 to 2038 (assuming tenants do not exercise renewal options or
termination rights, if any) as a percentage of annualized base minimum rent and GLA as of the time of the lease expiry.
1 Excludes Properties Under Development.
2 Total base minimum rent excludes future contractual escalations.
3 Canada Square is included at the REIT's one-third share of leasehold interest.
4 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on
or before December 31, 2018.
CT REIT 2018 ANNUAL REPORT 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
4.9 Top 10 Tenants Excluding CTC Banners
CT REIT’s 10 largest tenants, excluding all Canadian Tire stores and Other CTC Banners, as represented by the percentage of
total annualized base rental revenue, are:
Rank Tenant Name
1
2
3
4
5
6
7
8
9
Loblaws/Shoppers Drug Mart/No Frills
Save-On-Foods/Buy-Low Foods
Canadian Imperial Bank of Commerce
Winners/Marshalls
Metro
Sobeys/FreshCo/Farm Boy
Dollarama
Best Buy
GoodLife Fitness
10
Royal Bank of Canada
Percentage of total
annualized base
minimum rent 1
0.55%
0.52%
0.49%
0.44%
0.32%
0.29%
0.26%
0.24%
0.21%
0.18%
3.5%
1 Occupancy and other leasing key performance measures have been prepared on a committed basis which includes the impact of existing lease agreements contracted on
or before December 31, 2018.
4.10 Leasing Activities
The future financial performance of CT REIT will be impacted by occupancy rates, trends in rental rates achieved on leasing or
renewing currently leased space, and contractual increases in rent. As at December 31, 2018, the REIT's occupancy rate was
98.7% (Q4 2017 - 98.6%), excluding Properties Under Development, refer to section 4.1 for further details. The REIT continues
to actively pursue tenants for occupancy of income-producing and Properties Under Development.
4.11 Recoverable Capital Costs
Many of the capital costs that will be incurred by CT REIT are recoverable from tenants pursuant to the terms of their leases. The
recoveries will occur either in the year in which such expenditures are incurred or, in the case of a major item of replacement or
betterment, on a straight-line basis over the expected useful life thereof together with an imputed rate of interest on the unrecovered
balance at any point in time. Capital expenditures of $5,778 (Q4 2017 - $4,862) and $17,699 (YTD 2017 - $18,962) were incurred
during the three months and year ended December 31, 2018. Most of the REIT’s recoverable capital expenditures relate to parking
lots, roofs and heating, ventilation and air conditioning.
18 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
5.0 RESULTS OF OPERATIONS
5.1 Financial Results for the Three Months and Year Ended December 31, 2018
CT REIT's financial results for the three months and year ended December 31, 2018 and December 31, 2017 are summarized
below:
(in thousands of Canadian dollars, except per unit
amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
Change
2018
2017
Change
Property revenue
Property expense
$
119,322 $
111,264
7.2 % $
472,483 $
443,303
6.6 %
(26,804)
(23,724)
13.0 %
(108,636)
(98,290)
10.5 %
General and administrative expense
(3,453)
(2,722)
26.9 %
(12,189)
(11,045)
10.4 %
Net interest and other financing charges
(26,086)
(24,425)
6.8 %
(104,380)
(96,378)
8.3 %
Fair value adjustment on investment properties
11,522
36,701
(68.6)%
53,628
79,687
(32.7)%
Net income and comprehensive income
Net income per unit - basic
Net income per unit - diluted
$
$
$
74,501 $
97,094
(23.3)% $
300,906 $
317,277
0.343 $
0.271 $
0.454
0.364
(24.4)% $
1.401 $
(25.5)% $
1.098 $
1.501
1.232
(5.2)%
6.7 %
10.9 %
Property Revenue
Property revenue includes all amounts earned from tenants pursuant to lease agreements including property taxes, operating
costs and other recoveries. Many of CT REIT’s expenses are recoverable from tenants pursuant to their leases, with the REIT
absorbing these expenses to the extent that vacancies exist.
Total revenue for the three months ended December 31, 2018 was $119,322 which was $8,058 (7.2%) higher compared to the
same period in the prior year primarily due to base rent related to properties acquired and intensifications completed during 2018
and 2017. Total revenue included expense recoveries in the amount of $24,923 (Q4 2017 - $21,769).
Total revenue for the year ended December 31, 2018 was $472,483 which was $29,180 (6.6%) higher compared to the same
period in the prior year primarily due to base rent related to properties acquired and intensifications completed during 2018 and
2017. Total revenue included expense recoveries in the amount of $99,900 (2017 - $90,376).
The total amount of base rent received from operating leases is recognized on a straight-line basis over the term of the lease. For
the three months ended December 31, 2018, straight-line rent of $4,535 (Q4 2017 - $5,648) was included in total property revenue.
For the year ended December 31, 2018, straight-line rent of $18,404 (2017 - $22,822) was included in total property revenue.
Property Expense
The components of property expense consist primarily of property taxes, other recoverable operating expenses, property
management (including the outsourcing of property management services) and ground rent. The majority of property expenses
are recoverable from tenants, with CT REIT absorbing these expenses to the extent that vacancies exist.
CT REIT 2018 ANNUAL REPORT 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
Property expenses for the three months ended December 31, 2018 increased $3,080 (13.0%) compared to the same period in
the prior year primarily due to property acquisitions completed during 2018 and 2017.
Property expenses for the year ended December 31, 2018 increased $10,346 (10.5%) compared to the same period in the prior
year primarily due to property acquisitions completed during 2018 and 2017.
The following section contains forward-looking information and readers are cautioned that actual results may vary.
General and Administrative Expense
CT REIT has a number of broad categories of general and administrative expenses: (i) personnel, (ii) public entity and other costs,
including external audit fees, trustee compensation expense, legal and professional fees, travel, income tax expense (recovery)
related to CT REIT GP Corp.'s ("GP") activities, and land transfer tax; and (iii) outsourced costs, which may fluctuate depending
on when such costs are incurred. The personnel, public entity and other costs reflect the expenses related to ongoing operations
of CT REIT. The outsourced costs are largely related to certain administrative, financial, information technology, internal audit
and other support services provided by CTC to the REIT pursuant to the Services Agreement, as further described in section 8.0.
(in thousands of Canadian dollars)
For the periods ended December 31,
Personnel expense
Services Agreement with CTC
Public entity and other
Three Months Ended
Year Ended
2018
2017
Change
2018
2017
Change
$
2,177
$
1,435
51.7 % $
6,233
$
893
383
763
524
17.0 %
(26.9)%
3,345
2,611
5,291
3,014
2,740
17.8 %
11.0 %
(4.7)%
10.4 %
General and administrative expense
$
3,453
$
2,722
26.9 % $
12,189
$
11,045
As a percent of property revenue
2.9%
2.4%
2.6%
2.5%
The REIT has historically outsourced a number of its functions with respect to property management and support services.
Management has commenced the process to insource certain of these functions while maintaining other outsourced relationships.
The REIT has contracted to install an information system (“ERP”) by mid-2019. This will change the REIT’s financial reporting
system and certain operating systems making it less reliant on CTC's systems. In addition, the scope of services provided by
CTC under the Services Agreement may be impacted. It is expected that the REIT will end its relationship with one of its external
property management services providers by mid-2019.
The scope of the services under the Property Management Agreement and the Services Agreement with CTC will change once
the changes are fully implemented.
The REIT expects that there will be a net positive change related to general and administrative expenses and property operating
expenses once the transition is completed.
General and administrative expenses amounted to $3,453 or 2.9% of property revenue for the three months ended December 31,
2018 which is $731 (26.9%) higher compared to the same period in the prior year primarily due to:
20 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
•
•
•
increased personnel expenses due to CFO transition costs and various components of unit based awards; and
increased consulting and Services Agreement costs related to the new ERP CT REIT expects to implement in 2019;
partially offset by
decreased compensation costs and trustee fees due to the fair value adjustment on unit based awards.
General and administrative expenses amounted to $12,189 or 2.6% of property revenue for the year ended December 31, 2018
which is $1,144 (10.4%) higher compared to the same period in the prior year primarily due to:
•
•
•
increased personnel expenses due to CFO transition costs, various components of unit based awards and increased
headcount; and
increased consulting and Services Agreement costs related to the new ERP CT REIT expects to implement in 2019;
partially offset by
decreased compensation costs and trustee fees due to the fair value adjustment on unit based awards.
Net Interest and Other Financing Charges
As at December 31, 2018 the Partnership had 1,451,550 Class C LP Units outstanding with a face value of $1,451,550 and bearing
a weighted average distribution rate of 4.70% per annum. The Class C LP Units are subject to redemption rights. Accordingly,
the Class C LP Units are classified as financial liabilities and distributions on the Class C LP Units are presented in the net interest
and other financing charges in the consolidated statements of income and comprehensive income.
Net interest and other financing charges are comprised of the following:
(in thousands of Canadian dollars)
For the periods ended December 31,
Interest on Class C LP Units 1
Three Months Ended
Year Ended
2018
2017
Change
2018
2017
Change
$
17,055 $
17,055
— % $
68,219 $
68,826
(0.9)%
Interest and financing costs - debentures
9,001
7,010
28.4 %
35,187
25,207
39.6 %
Interest and financing costs - Bank Credit Facility
Interest on mortgages payable
Interest costs - Bridge Facility 2
371
408
—
317
511
17.0 %
(20.2)%
126
(100.0)%
1,561
1,532
351
1,972
(20.8)%
1,777
(13.8)%
126
NM
$
26,835 $
25,019
7.3 % $
106,850 $
97,908
9.1 %
Less: capitalized interest
(643)
(562)
14.4 %
(2,245)
(1,365)
64.5 %
Interest and other financing charges less capitalized
interest
Less: interest income
Net interest and other financing charges
$
$
26,192 $
24,457
7.1 % $
104,605 $
96,543
8.4 %
(106)
(32)
NM
(225)
(165)
36.4 %
26,086 $
24,425
6.8 % $
104,380 $
96,378
8.3 %
1 CTC elected to defer receipt of distributions on the Series 3-12 and Series 16 and Series 19 Class C LP Units for the three months and year ended December 31, 2018 in the
amount of $16,916 (Q4 2017 -$16,917) and $62,027 (YTD 2017 - $62,380), respectively, until the first business day following the end of the fiscal year and receive a loan in lieu
thereof. The deferred distributions have been netted against interest payable on Class C LP Units and are included under the heading "other liabilities" on the consolidated
balance sheets.
2 Paid to CTC.
Net interest and other financing charges for the three months and year ended December 31, 2018 was $1,661 (6.8%) and $8,002
(8.3%) higher, respectively, compared to the same period in the prior year primarily due to increased interest on the debentures
issued in June 2017 and February 2018, partially offset by savings resulting from the redemption of Series 10-15 Class C LP Units
in May 2017, changes in the utilization of the Bank Credit Facility and increased interest capitalization on development projects in
CT REIT 2018 ANNUAL REPORT 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
2018. The net effect is that the REIT has replaced short term inexpensive variable rate debt with longer term higher fixed rate debt,
which has resulted in a reduction in CT REIT's interest rate and refinancing risks.
Fair Value Adjustment on Investment Properties
The fair value gain on investment properties for the three months ended December 31, 2018 decreased by $25,179 compared to
the same period in the prior year. The decrease in the fair value adjustment on investment properties is primarily due to net higher
gains in the prior year on the distribution centre in Bolton, Ontario.
The fair value gain on investment properties for the year ended December 31, 2018 decreased by $26,059 compared to the prior
year. The decrease is primarily due to the net higher gains recorded for the distribution centre in Bolton, Ontario discussed above.
Income Tax Expense
Management operates CT REIT in a manner that enables the REIT to continue to qualify as a real estate investment trust pursuant
to the Income Tax Act (Canada) (“ITA”). CT REIT distributes 100% of its taxable income to Unitholders and therefore does not incur
income tax expense in relation to its activities.
If CT REIT fails to distribute the required amount of taxable income to Unitholders, or if CT REIT fails to qualify as a REIT under
the ITA, substantial adverse tax consequences may occur. Refer to section 11.0 for further information.
Net Income
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
Change
2018
2017
Change
Net income and comprehensive income
Net income per unit - basic
Net income per unit - diluted
$
$
$
74,501 $
97,094
(23.3)% $
300,906 $
317,277
0.343 $
0.454
(24.4)% $
1.401 $
1.501
(5.2)%
(6.7)%
0.271 $
0.364
(25.5)% $
1.098 $
1.232
(10.9)%
Net income decreased by $22,593 (23.3%) and $16,371 (5.2%), respectively, for the three months and year ended December 31,
2018 compared to the same periods in the prior year for the reasons discussed previously.
Net income per unit - basic decreased by $0.111 (24.4%) and $0.100 (6.7%) for the three months and year ended December 31,
2018 compared to the same periods in the prior year primarily due to an increase in the weighted average number of units
outstanding - basic, partially offset by decreased net income, as discussed previously.
Net income per unit - diluted decreased by $0.093 (25.5%) and $0.134 (10.9%) for the three months and year ended December 31,
2018 compared to the same period in the prior year primarily due to a decrease in net income, as discussed previously, in addition
to an increase in the dilutive effect of settling Class C LP Units with Class B LP Units and an increase in the weighted average
number of units outstanding - basic.
22 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
5.2 Non-GAAP Measures
In addition to the GAAP measures already described, CT REIT management uses non-GAAP measures in assessing the financial
performance of CT REIT. Refer to section 1.0 and 10.0 in this MD&A for further information.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
Change
2018
2017
Change
Net operating income
Same store NOI
Same property NOI
Funds from operations
FFO per unit - basic
FFO per unit - diluted (non-GAAP)
Adjusted funds from operations
AFFO per unit - basic
AFFO per unit - diluted (non-GAAP)
AFFO payout ratio
ACFO
EBITFV
Net Operating Income
$
$
$
$
$
$
$
$
$
$
$
87,998
83,064
83,319
62,037
0.286
0.286
51,848
0.239
0.239
76%
52,975
88,897
$
$
$
$
$
$
$
$
$
$
$
81,908
81,009
81,009
60,441
0.283
0.283
7.4 % $ 345,505
$ 322,253
2.5 % $ 321,926
$ 316,068
2.9 % $ 323,113
$ 316,329
2.6 % $ 246,032
$ 237,617
1.1 % $
1.1 % $
1.145
1.144
$
$
1.124
1.124
49,636
4.5 % $ 205,173
$ 194,371
0.232
0.232
3.0 % $
3.0 % $
0.955
0.954
$
$
0.920
0.919
75%
1.3 %
76%
76%
53,119
84,674
(0.3)% $ 206,056
$ 195,723
5.0 % $ 351,876
$ 334,193
7.2%
1.9%
2.1%
3.5%
1.9%
1.8%
5.6%
3.8%
3.8%
—%
5.3%
5.3%
NOI for the three months ended December 31, 2018 increased $6,090 (7.4%) compared to the same period in the prior year
primarily due to the acquisition of income-producing properties and Properties Under Development completed in 2018 and 2017,
which contributed $3,780 to NOI growth. NOI for Properties Under Development for the three months ended December 31, 2018
was $968.
Same store NOI and same property NOI for the three months ended December 31, 2018 increased $2,055 (2.5%) and $2,310
(2.9%), respectively, when compared to the prior year primarily for the following reasons:
•
contractual rent escalations of 1.5% per year, on average, contained within the Canadian Tire store and CTC's DC leases,
which are generally effective January 1st, contributed $1,510 to NOI growth;
•
•
•
recovery of capital expenditures and interest earned on the unrecovered balance contributed $471 to NOI growth; and
intensifications completed in 2018 and 2017 contributed to $255 to NOI growth; partially offset by
the impact of tenancies at 11 Dufferin Place SE and 25 Dufferin Place SE Calgary, Alberta, which decreased NOI by
$372.
NOI for the year ended December 31, 2018 increased $23,252 (7.2%) compared to the same period in the prior year primarily
due to the acquisition of income-producing properties and Properties Under Development completed in 2018 and 2017, which
contributed $16,468 to NOI growth. NOI for Properties Under Development during the year ended December 31, 2018 was $3,572.
Same store NOI and same property NOI for the year ended December 31, 2018 increased $5,858 (1.9%) and $6,784 (2.1%),
respectively, when compared to the prior year primarily due to the following:
•
contractual rent escalations of approximately 1.5% per year, on average, pursuant to the Canadian Tire store and CTC's
DC leases, which are generally effective January 1st, contributed $4,721 to NOI growth;
CT REIT 2018 ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
•
•
•
•
recovery of capital expenditures and interest earned on the unrecovered balance which contributed $1,627 to NOI growth;
the adjustment of certain prior period rent charges contributed $690 to NOI growth;
intensifications completed in 2018 and 2017 contributed $926 to NOI growth; partially offset by
the impact of tenancies at 11 Dufferin Place SE and 25 Dufferin Place SE Calgary, Alberta, which decreased NOI by
$2,500.
Funds From Operations
FFO for the three months ended December 31, 2018 amounted to $62,037 or $0.286 per unit (diluted non-GAAP) which was
$1,596 (2.6%) or $0.003 (1.1%) per unit (diluted non-GAAP) higher than the same period in 2017 primarily due to the impact of
NOI variances, discussed earlier, partially offset by higher interest expense.
FFO for the year ended December 31, 2018 amounted to $246,032 or $1.144 per unit (diluted non-GAAP) which was $8,415
(3.5%) or $0.020 (1.8%) per unit (diluted non-GAAP) higher than the same period in 2017 primarily due to the impact of NOI
variances, discussed earlier partially offset by higher interest expense.
Adjusted Funds From Operations
AFFO for the three months ended December 31, 2018 amounted to $51,848 or $0.239 per unit (diluted non-GAAP) which was
$2,212 (4.5%) or $0.007 (3.0%) per unit (diluted non-GAAP) higher than the same period in 2017 primarily due to the impact of
NOI variances, discussed earlier, partially offset by higher interest expense.
AFFO for the year ended December 31, 2018 amounted to $205,173 or $0.954 per unit (diluted non-GAAP) which was $10,802
(5.6%) or $0.035 (3.8%) per unit (diluted non-GAAP) higher than the same period in 2017 primarily due to the impact of NOI
variances, as discussed earlier, partially offset by higher interest expense.
Adjusted Funds From Operations Payout Ratio
The AFFO payout ratio for the three months ended and year ended December 31, 2018 was 76%, which is consistent with the
same periods in 2017.
Adjusted Cashflow From Operations
ACFO for the three months ended December 31, 2018 decreased by $144 or 0.3% over the same period in 2017 primarily due to
higher interest expense.
ACFO for the year ended December 31, 2018 increased by $10,333 (5.3%) over the same period in 2017 primarily due to the
impact of NOI variances, discussed earlier, partially offset by higher interest expense.
Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments
EBITFV for the three months and year ended December 31, 2018 increased by $4,223 (5.0% ) and $17,683 (5.3%), respectively,
over the same periods in 2017, primarily due to the impact of NOI variances discussed earlier.
24 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
6.0 LIQUIDITY AND FINANCIAL CONDITION
The following section contains forward-looking information and readers are cautioned that actual results may vary.
6.1 Liquidity
CT REIT intends to fund capital expenditures for acquisitions and development activities through a combination of (i) cash on
hand, (ii) issuances of Class B LP Units and/or Class C LP Units, (iii) draws on the Bank Credit Facility, (iv) assumption of existing
debt, and/or (v) new public debt or equity financings.
(in thousands of Canadian dollars)
As at
Cash and cash equivalents
Unused portion of available credit facilities 1, 2
Liquidity
1 See section 6.10 for details on credit facilities.
2 The Bridge Facility was not available to CT REIT at December 31, 2018, see section 6.10.
December 31, 2018
December 31, 2017
$
$
4,991 $
282,633
287,624 $
10,902
267,994
278,896
Cash flow generated from operating the property portfolio represents the primary source of liquidity to service debt and to fund
planned maintenance expenditures, leasing costs, general and administrative expenses and distributions (other sources being
interest income as well as cash on hand).
(in thousands of Canadian dollars)
For the periods ended December 31,
Cash generated from operating activities
Cash used for investing activities
Cash used for financing activities
Cash (used for)/generated from the period
1 NM - not meaningful.
6.2 Discussion of Cash Flows
2018
331,722 $
(169,154)
(168,479)
(5,911) $
Year Ended
2017
317,154
(279,163)
(33,458)
4,533
$
$
Change 1
4.6 %
(39.4)%
NM
NM
Cash used for the year ended December 31, 2018 of $5,911 was primarily used for the repayment of credit facilities, distributions
and investing activities, being partially offset by cash generated from operating activities and the issuance of debentures and
equity.
On November 28, 2018, CT REIT completed a joint equity offering of an aggregate of 21,115,000 Units comprised of the
issuance of 5,179,000 Units from treasury for net proceeds of $62,276 after deducting issuance costs of $2,720 (the “REIT
Offering”) and the sale of 15,936,000 Units by CTC (the “Secondary Offering” and, together with the REIT Offering, referred to
as the “Equity Offering”). In connection with the Secondary Offering, CTC exchanged 744,414 Class B LP Units for 744,414
Units, in accordance with the terms of the Class B LP Units, which were then sold pursuant to the Secondary Offering.
CT REIT 2018 ANNUAL REPORT 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
6.3 Credit Ratings
The senior unsecured debt of CT REIT is rated by S&P Global Ratings acting through Standard and Poor's Rating Services
(Canada), a business unit of S&P Global Canada Corp. (“S&P”) and by DBRS Limited (“DBRS”), two independent credit rating
agencies which provide credit ratings of debt securities for commercial entities. A credit rating generally provides an indication
of the risk that the borrower will not fulfill its full obligations in a timely manner with respect to both interest and principal commitments.
Rating categories range from highest credit quality (generally “AAA”) to default in payment (generally “D”).
These ratings are related to and currently equivalent to those of CTC, as CTC holds a significant ownership position in CT REIT
and has a strategic relationship with CT REIT. In addition, CTC is expected to continue to be CT REIT’s most significant tenant
for the foreseeable future.
The following table sets out the current credit ratings of CT REIT's senior unsecured debt:
Credit Ratings (Canadian Standards)
6.4 Debt and Capital Structure
CT REIT’s debt and capital structure is as follows:
(in thousands of Canadian dollars)
As at
Class C LP Units
Mortgages payable
Debentures
Credit facilities
Total indebtedness
Unitholders' equity
Non-controlling interests
Total capital under management
DBRS
S&P
Credit Rating
BBB (high)
Trend
Credit Rating
Stable
BBB+
Trend
Stable
December 31, 2018
December 31, 2017
1,451,550 $
1,451,550
37,100
1,069,844
14,995
2,573,489 $
1,306,355
1,778,554
5,658,398 $
44,010
869,471
179,941
2,544,972
1,168,777
1,692,664
5,406,413
$
$
$
CT REIT’s total indebtedness at December 31, 2018 was higher than at December 31, 2017 primarily due to the issuance of Series
F debentures in February 2018, partially offset by a decrease in amounts drawn on the credit facilities, refer to section 6.6 for
further details.
CT REIT’s Unitholders’ equity and non-controlling interests at December 31, 2018 increased as compared to December 31, 2017
primarily as a result of the Equity Offering and net income exceeding distributions.
26 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Future payments in respect of CT REIT’s indebtedness as at December 31, 2018 are as follows:
Mortgages payable
(in thousands of Canadian dollars)
Principal
amortization
2019
2020
2021
2022
2023 and thereafter
Total contractual obligation
Unamortized portion of mark to market on
mortgages payable assumed in connection
with the acquisition of properties
Unamortized transaction costs
$
$
Maturities
37,133
—
—
—
—
Class C LP
Units
—
251,550
—
—
1,200,000
Debentures
Credit
facilities
— $
14,995
—
150,000
150,000
775,000
—
—
—
—
Total
52,128
251,550
150,000
150,000
1,975,000
—
—
—
—
—
— $
37,133 $
1,451,550 $
1,075,000 $
14,995 $
2,578,678
—
—
—
(33)
—
—
—
(5,156)
—
—
—
(5,189)
— $
37,100 $
1,451,550 $
1,069,844 $
14,995 $
2,573,489
Interest rates on CT REIT’s indebtedness range from 2.16% to 5.00%. The maturity dates on the indebtedness range from January
2019 to May 2038. Total indebtedness at December 31, 2018 had a weighted average interest rate of 4.08% and a weighted
average term to maturity of 9.0 years, excluding the credit facilities, which is consistent with the rate and term as at December 31,
2017.
As at December 31, 2018, floating rate and fixed rate indebtedness were $52,128 and $2,521,361, respectively.
As at
Variable rate debt
Total indebtedness
Variable rate debt / total indebtedness
December 31, 2018
December 31, 2017
$
52,128
$
2,573,489
2.03%
217,074
2,544,972
8.53%
CT REIT's variable rate debt to total indebtedness ratio as at December 31, 2018 decreased as compared to December 31, 2017
primarily due to the proceeds of the new debenture offering being used to reduce borrowings drawn on the variable rate credit
facilities in 2018.
CT REIT 2018 ANNUAL REPORT 27
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents the contractual obligations of CT REIT:
Class C LP Units 1
Debentures
Payments on Class C LP Units 1
Interest on debentures
Credit facilities 2
Operating ground lease
commitments
Mortgages payable
Obligations for the completion of
developments
Other liabilities
Distributions payable 3
Payable on Class C LP Units, net of
loans receivable
Interest on Bank Credit Facility
Interest on mortgages payable
Total
Total
2019
2020
2021
$ 1,451,550 $
— $
251,550 $
— $
2022
—
2023
2024 and
thereafter
— $ 1,200,000
Payments Due by Period
1,075,000
784,644
239,427
14,995
43,761
37,133
129,163
28,303
13,898
5,685
2,465
1,430
—
68,219
34,949
—
3,487
37,133
95,903
24,955
13,898
5,685
519
1,430
—
150,000
150,000
—
775,000
62,258
34,949
—
3,434
—
33,260
3,348
—
—
519
—
58,000
33,330
—
58,000
29,572
—
58,000
27,433
14,995
480,167
79,194
—
3,134
2,790
2,543
28,373
—
—
—
—
—
519
—
—
—
—
—
—
519
—
—
—
—
—
—
389
—
—
—
—
—
—
—
—
$ 3,827,454 $
286,178 $
389,318 $
244,983 $
240,881
$ 2,562,734
1 Assume redemption on Initial Fixed Rate Period for each series.
2 The Bank Credit Facility matures in December 2023. However, the borrowings drawn against the Bank Credit Facility as at December 31, 2018 of $14,995 is classified as a
current liability as management expects to repay this amount within the next twelve months.
3 On Units and Class B LP Units.
The table below presents CT REIT’s interest in investment properties at fair value that are available to it to finance and/or refinance
its debt as at December 31, 2018:
(in thousands of Canadian dollars)
Unencumbered investment properties
Encumbered investment properties
Total
Number of
properties
Fair value of
investment
properties
341 $
5,619,143
1
77,050
342 $
5,696,193
Percentage of
total assets
Mortgages
payable
Loan to value
ratio
98.4% $
1.3%
99.8% $
—
37,100
37,100
—
48.2%
0.7%
The table below presents CT REIT’s secured debt as a percentage of total indebtedness:
(in thousands of Canadian dollars)
As at
Secured debt
Total indebtedness
Secured debt / total indebtedness
December 31, 2018
December 31, 2017
$
37,100
$
2,573,489
1.44%
44,010
2,544,972
1.73%
CT REIT's secured debt to total indebtedness ratio at December 31, 2018 decreased as compared to December 31, 2017, primarily
due to the issuance of Series F debentures in February 2018 as well as repayment of the 11 Dufferin mortgage, this was partially
offset by the repayment of borrowings drawn on its credit facilities.
28 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The table below presents CT REIT’s indebtedness to EBITFV ratio:
(in thousands of Canadian dollars)
As at
Total indebtedness
EBITFV 1
Total indebtedness / EBITFV
December 31, 2018
December 31, 2017
$
$
2,573,489 $
351,876
7.31
2,544,972
334,193
7.62
1 Non-GAAP measure. Refer to section 10.0 for further information. 2018 EBITFV is annualized based on EBITFV for the year ended December 31, 2018.
CT REIT's indebtedness to EBITFV ratio at December 31, 2018 decreased as compared to the indebtedness to EBITFV ratio at
December 31, 2017 primarily due to the growth of EBITFV exceeding the growth of CT REIT's total indebtedness. The growth in
EBITFV was primarily due to increased NOI, as discussed earlier.
6.5 Interest Coverage Ratio
Interest coverage ratios are used to measure an entity’s ability to service its debt. Generally, the higher the ratio is, the lower the
risk of default on debt. The ratio is calculated as follows:
(in thousands of Canadian dollars)
For the periods ended December 31,
EBITFV 1 (A)
Interest and other financing charges (B)
Interest coverage ratio (A)/(B)
1 Non-GAAP measure. Refer to section 10.0 for further information.
Three Months Ended
Year Ended
$
$
2018
88,897 $
26,192 $
3.39
2017
2018
2017
84,674 $
351,876 $
334,193
24,457 $
104,605 $
3.46
3.36
96,543
3.46
The decrease in the interest coverage ratio for the three months and year ended December 31, 2018, as compared to the same
period in 2017, is primarily due to the growth of interest and other financing charges exceeding the growth of CT REIT's EBITFV.
6.6 Indebtedness Ratio
CT REIT has adopted an indebtedness ratio guideline which management uses as a measure to evaluate its leverage and the
strength of its equity position, expressed as a percentage of financing provided by debt. CT REIT’s Declaration of Trust limits its
indebtedness (plus the aggregate par value of the Class C LP Units) to a maximum of 60% of the gross book value, excluding
convertible debentures, and 65% including convertible debentures. Gross book value is defined as total assets as reported on
the latest consolidated balance sheet.
CT REIT calculates its indebtedness ratio as follows:
(in thousands of Canadian dollars)
As at
Total indebtedness 1 (A)
Total assets (B)
Indebtedness ratio (A)/(B)
December 31, 2018
December 31, 2017
$
$
2,573,489
5,708,692
$
$
2,544,972
5,455,398
45.1%
46.7%
1 Total indebtedness reflects the value of the Class C LP Units, mortgages payable, debentures and draws on the credit facilities.
CT REIT 2018 ANNUAL REPORT 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
The indebtedness ratio as at December 31, 2018 decreased compared to the indebtedness ratio as at December 31, 2017 primarily
due to CT REIT's 2018 acquisition, intensification and development activities and fair value adjustments made to its investment
property portfolio partially offset by an increase in total indebtedness.
6.7 Class C LP Units
As at December 31, 2018 there were 1,451,550 Class C LP Units outstanding, all of which were held by CTC. The Class C LP
Units are designed to provide CTC with an interest in the Partnership that entitles holders to a fixed cumulative monthly payment,
during the initial fixed rate period for each series of Class C LP Units (the “Initial Fixed Rate Period”), equal to a weighted average
rate of 4.70% of the aggregate capital amount ascribed to the Class C LP Units. Such payments are made in priority to distributions
made to holders of Class B LP Units and units representing an interest in the GP ("GP Units")(subject to certain exceptions) if,
as and when declared by the Board of Directors of the GP and are payable monthly at an annual distribution rate for each series
as set out in the table below. In addition, the Class C LP Units are entitled to receive Special Voting Units, refer to section 7.0, in
certain limited circumstances.
On expiry of the Initial Fixed Rate Period applicable to each series of Class C LP Units, and each five-year period thereafter,
each such series of Class C LP Units is redeemable at par (together with all accrued and unpaid payments thereon) at the option
of the Partnership or the holder, upon giving at least 120 days’ prior notice. The Partnership further has the ability to settle any
of the Class C LP Units at any time after January 1, 2019 at a price equal to the greater of par and a price to provide a yield equal
to the then equivalent Government of Canada bond yield plus a spread, so long as such redemption is in connection with a sale
of properties.
Such redemptions of Class C LP Units (other than upon a change of control of CT REIT) can be settled at the option of the
Partnership, in cash or Class B LP Units of equal value.
During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year
period thereafter, if not redeemed, the fixed payment rate for Class C LP Units will be reset, and the holders of Class C LP Units
will be entitled, subject to certain conditions, to elect either a fixed rate or floating rate option.
30 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table presents the details of the Class C LP Units:
Series of Class C LP Units
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8
Series 9
Series 16
Series 17
Series 18
Series 19
Total / weighted average
Current
Non-current
Total
6.8 Debentures
Series
A, 2.85%, June 9, 2022
B, 3.53%, June 9, 2025
C, 2.16%, June 1, 2021
D, 3.29%, June 1, 2026
E, 3.47%, June 16, 2027
F, 3.87%, December 7, 2027
Annual
distribution rate
during Initial
Fixed Rate Period
4.50%
Expiry of Initial
Fixed Rate Period
May 31, 2020 (1.4 years)
4.50%
4.50%
May 31, 2024 (5.4 years)
May 31, 2028 (9.4 years)
5.00% May 31, 2031 (12.4 years)
5.00% May 31, 2034 (15.4 years)
5.00% May 31, 2035 (16.4 years)
5.00% May 31, 2038 (19.4 years)
2.42%
2.39%
2.28%
2.28%
4.70%
May 31, 2020 (1.4 years)
May 31, 2020 (1.4 years)
May 31, 2020 (1.4 years)
May 31, 2020 (1.4 years)
11.1 years
100.0%
% of Total
Class C LP
Units
13.78%
13.78%
13.78%
13.78%
13.78%
13.78%
13.78%
1.14%
1.27%
0.34%
0.80%
Initial
subscription
price
200,000
200,000
200,000
200,000
200,000
200,000
200,000
16,550
18,500
4,900
11,600
1,451,550
—
1,451,550
1,451,550
$
$
$
$
December 31, 2018
December 31, 2017
Face value
Carrying
amount
Face value
$
150,000 $
149,475 $
150,000 $
200,000
150,000
200,000
175,000
200,000
198,949
149,577
198,995
174,036
198,812
200,000
150,000
200,000
175,000
—
Carrying
amount
149,277
198,739
149,270
198,717
173,468
—
$
1,075,000 $
1,069,844 $
875,000 $
869,471
Debentures as at December 31, 2018 had a weighted average interest rate of 3.25% (December 31, 2017 - 3.11%).
On February 7, 2018 CT REIT issued $200,000 aggregate principal amount of senior unsecured debentures, with an interest rate
of 3.87%. The proceeds, net of issuance costs of $1,380, were used to pay down certain amounts outstanding under its credit
facilities and the balance of proceeds were retained for general business purposes.
For the three months and year ended December 31, 2018, amortization of the transaction costs of $261 (Q4 2017 - $205) and
$1,043 (YTD 2017 - $756) is included in net interest and other financing charges on the consolidated statement of income and
comprehensive income (refer to Note 14 to the 2017 audited annual consolidated financial statements).
The debentures have been rated "BBB+" by S&P and "BBB (high)" by DBRS, both with a stable outlook. The debentures are direct
senior unsecured obligations of CT REIT, refer to section 6.3 for further details.
CT REIT 2018 ANNUAL REPORT 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
6.9 Mortgages Payable
Mortgages payable, secured by certain CT REIT investment properties, include the following:
(in thousands of Canadian dollars)
As at
Current
Non-current
Total
December 31, 2018
December 31, 2017
Face value
Carrying
amount
Face value
$
$
37,133 $
37,100 $
422 $
—
—
43,626
37,133 $
37,100 $
44,048 $
Carrying
amount
415
43,595
44,010
Mortgages payable at December 31, 2018 had a weighted average interest rate of 3.81% (December 31, 2017 – 3.07%).
6.10 Credit Facilities
Bank Credit Facility
CT REIT has a $300,000 unsecured revolving credit facility with a syndicate of major Canadian third party banks ("Bank Credit
Facility") available until December 2023. The Bank Credit Facility bears interest at a rate based on the bank’s prime rate of interest
or bankers’ acceptances plus a margin. A standby fee is charged on the Bank Credit Facility.
As at December 31, 2018, $14,995 (December 31, 2017 - $53,941) of borrowings were drawn on the Bank Credit Facility. At
December 31, 2018, borrowings under the Bank Credit Facility had a weighted average interest rate of 3.46% (December 31,
2017 - 2.33%).
The table below summarizes the details of the Bank Credit Facility as at December 31, 2018:
(in thousands of Canadian dollars)
Bank Credit Facility
$
300,000 $
14,995 $
2,372 $
282,633
Maximum loan
amount
Cash advances
Letters of credit Available to be drawn
Bridge Facility
In December 2017, CT REIT entered into a loan agreement with CTC ("Bridge Facility") solely for the purpose of facilitating the
acquisition of a portfolio of certain investment properties. The Bridge Facility was repaid in Q1 2018 and was not available to CT
REIT at December 31, 2018.
As at December 31, 2018, $nil (December 31, 2017 - $126,000) borrowings were drawn on the Bridge Facility.
32 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following section contains forward-looking information and readers are cautioned that actual results may vary.
6.11 Capital Strategy
Management expects the REIT’s future debt will be in the form of:
• Class C LP Units (treated as debt for accounting purposes);
•
•
•
funds drawn on the Bank Credit Facility;
unsecured public debt; and
secured debt.
Management’s objectives are to access an optimal cost of capital with the most flexible terms, to have a maturity/redemption
schedule (for fixed term obligations) spread over a time horizon so as to manage refinancing risk and to be in a position to finance
acquisition and development opportunities when they become available. The Declaration of Trust and the trust indenture dated
June 9, 2015, as supplemented by supplemental indentures thereto (the "Trust Indenture") limit the REIT’s overall indebtedness
ratio to 60% of total aggregate assets, excluding convertible debentures, and 65% including convertible debentures.
CT REIT’s indebtedness ratio was 45.1% as at December 31, 2018. Refer to section 6.6 for the definition and calculation of CT
REIT’s indebtedness ratio.
At December 31, 2018, CT REIT was in compliance with the financial covenants contained in the Declaration of Trust, the Trust
Indenture and the Bank Credit Facility.
CT REIT has also adopted interest coverage guidelines which provide an indication of the REIT’s ability to service or pay the
interest charges relating to the underlying debt.
CT REIT will generally operate its affairs and manage its capital structure so that its interest coverage ratio is in a range of 2.4 to
3.8 times. For the three months ended December 31, 2018, CT REIT’s interest coverage ratio was 3.4 times. Refer to section
6.5 for the definition and calculation of CT REIT’s interest coverage ratio.
Assuming a future economic environment that is substantially similar to the current environment, management does not foresee
any material impediments to refinancing future debt maturities.
The following section contains forward-looking information and readers are cautioned that actual results may vary.
6.12 Commitments and Contingencies
As at December 31, 2018, CT REIT had obligations of $129,163 (December 31, 2017 - $39,227) in future payments for the
completion of developments, as described in section 4.6. Included in the commitment is $123,057 due to CTC.
CT REIT 2018 ANNUAL REPORT 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
CT REIT has sufficient liquidity to fund these future commitments as a result of (i) its conservative use of leverage on the balance
sheet, (ii) liquidity on hand, (iii) its Bank Credit Facility, (iv) an investment grade credit rating, (v) unencumbered assets, and (vi)
sufficient operating cash flow retained in the business.
6.13 Base Shelf Prospectus
CT REIT renewed its short form base shelf prospectus in Q2 2017 under which it may raise up to $2.0 billion of debt and/or equity
over the 25 month period ending May 3, 2019 (the "Base Shelf Prospectus"). The Base Shelf Prospectus also qualifies the sale
of Units by CTC. In Q4 2018,the Equity Offering was completed. In connection with the Secondary Offering, CTC exchanged
744,414 Class B LP Units for 744,414 Units, in accordance with the terms of the Class B LP Units, which were then sold pursuant
to the Secondary Offering. In Q1 2018, the REIT issued $200,000 of debentures under a prospectus supplement dated January
24, 2018 to CT REIT's Base Shelf Prospectus, as described in section 6.8.
7.0 EQUITY
7.1 Authorized Capital and Outstanding Units
CT REIT is authorized to issue an unlimited number of Units. As of December 31, 2018, CT REIT had a total of 96,848,606 Units
outstanding, 44,519,508 of which were held by CTC, and 123,400,633 Class B LP Units outstanding (together with a corresponding
number of Special Voting Units, as hereinafter defined), all of which were held by CTC.
Class B LP Units are economically equivalent to Units, are accompanied by a special voting unit ("Special Voting Unit") and are
exchangeable at the option of the holder for Units (subject to certain conditions). Holders of the Class B LP Units are entitled to
receive distributions when declared by the Partnership equal to the per Unit amount of distributions payable on the Units. However,
Class B LP Units have limited voting rights over the Partnership.
The following tables summarize the total number of Units issued:
Total outstanding at beginning of year
Issued
REIT Offering
Exchange of Class B LP Units for Units
Total outstanding at end of year
1 274,642 issued pursuant to the REIT's distribution reinvestment plan.
Total outstanding at beginning of year
Issued
Total outstanding at end of year
1 166,193 issued pursuant to the REIT's distribution reinvestment plan.
34 CT REIT 2018 ANNUAL REPORT
As at December 31, 2018
Units 1
Class B LP
Units
Total
90,645,295
123,092,866
213,738,161
279,897
1,052,181
5,179,000
744,414
—
(744,414)
1,332,078
5,179,000
—
96,848,606
123,400,633
220,249,239
As at December 31, 2017
Units 1
Class B LP
Units
Total
90,479,102
116,367,697
206,846,799
166,193
6,725,169
6,891,362
90,645,295
123,092,866
213,738,161
MANAGEMENT'S DISCUSSION AND ANALYSIS
Each Unit is transferable and represents an equal, undivided beneficial interest in the REIT and in any distributions from the REIT.
Each Unit entitles the holder to one vote at all meetings of Unitholders.
Special voting units are only issued in tandem with Class B LP Units or in limited circumstances, to holders of the Class C LP
Units and are not transferable separately from the Class B LP Units or Class C LP Units to which they relate ("Special Voting
Units"). Each Special Voting Unit entitles the holder thereof to one vote at all meetings of Unitholders or with respect to any written
resolution of Unitholders. Except for the right to attend meetings and vote on resolutions, Special Voting Units do not confer upon
the holders thereof any other rights.
Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net
income per unit are calculated as follows:
For the Year ended December 31, 2018
(in thousands of Canadian dollars, except unit amounts)
Units
Class B LP
Units
Net income attributable to Unitholders - basic
$
128,030 $
172,876 $
Income effect of settling Class C LP Units with Class B LP Units
Net income attributable to Unitholders - diluted
Weighted average units outstanding - basic
Dilutive effect of other Unit plans
Dilutive effect of settling Class C LP Units with Class B LP Units
Weighted average units outstanding - diluted
Income effect of settling Class C LP Units with Class B LP Units
Net income attributable to Unitholders - diluted
Weighted average units outstanding - basic
Dilutive effect of other Unit plans
Dilutive effect of settling Class C LP Units with Class B LP Units
Weighted average units outstanding - diluted
(in thousands of Canadian dollars, except unit amounts)
Units Class B LP Units
Net income attributable to Unitholders - basic
$
135,822 $
181,455 $
91,326,658
123,478,988
214,805,646
234,427
121,102,386
336,142,459
For the Year ended December 31, 2017
Total
300,906
68,219
369,125
Total
317,277
68,826
386,103
$
$
90,561,829
120,748,416
211,310,245
146,241
101,882,284
313,338,770
CT REIT 2018 ANNUAL REPORT 35
MANAGEMENT'S DISCUSSION AND ANALYSIS
7.2 Equity
(in thousands of Canadian dollars)
As at
Equity - beginning of the period
Net income and comprehensive income for the period
Issuance of Units from REIT Offering, net of issue costs
Issuance of Class B LP Units, net of issue costs
Distributions to non-controlling interests
Distributions to Unitholders
Issuance of Units under Distribution Reinvestment Plan and other
December 31, 2018
December 31, 2017
$
2,861,441 $
300,906
62,276
14,022
(90,208)
(67,050)
3,522
2,590,584
317,277
—
99,705
(84,873)
(63,606)
2,354
Equity - end of the period
$
3,084,909 $
2,861,441
The following section contains forward-looking information and readers are cautioned that actual results may vary.
7.3 Distributions
CT REIT’s primary business goal is to accumulate a portfolio of high-quality real estate assets and deliver the benefits of such
real estate ownership to Unitholders. The primary benefit to Unitholders is expected to be reliable, durable and growing distributions
over time.
In determining the amount of the monthly distributions paid to Unitholders, the Board applies discretionary judgment to forward-
looking cash flow information, such as forecasts and budgets, and many other factors including provisions in the Declaration of
Trust, the macro-economic and industry-specific environment, debt maturities, covenants and taxable income.
The Board regularly reviews CT REIT’s rate of distributions to ensure an appropriate level of distributions.
On November 5, 2018, the Board reviewed and approved the current rate of distribution of $0.728 per Unit per year and approved
an increase in the annual rate of distribution to $0.757 per Unit per year, or monthly distribution rate of $0.0631 per Unit, when
declared, commencing with the December 31, 2018 record date.
On December 14, 2018, CT REIT's Board declared a distribution of $0.0631 per Unit paid on January 15, 2019 to holders of Units
and Class B LP Units of record as of December 31, 2018.
On January 15, 2019, CT REIT’s Board declared a distribution of $0.0631 per Unit payable on February 15, 2019 to holders of
Units and Class B LP Units of record as of January 31, 2019.
One of CT REIT's objectives is to grow monthly distributions. The distribution payments and increases since December 31, 2014
are as follows:
36 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
2019 2
2018
2017
2016
2015
2014
Monthly
distribution per
Unit 1
% increase
Annualized
distribution
per Unit
Annualized
increase
per Unit
$
$
$
$
$
$
0.0631
0.06067
0.05833
0.05667
0.05525
0.05417
4.0% $
4.0% $
2.9% $
2.6% $
2.0% $
— $
0.757 $
0.728 $
0.700 $
0.680 $
0.663 $
0.650 $
0.0290
0.0280
0.0200
0.0170
0.0130
—
1 The Board has discretion over the determination of monthly and annual distributions.
2 Approved by the Board on November 5, 2018.
Net income prepared in accordance with IFRS recognizes certain revenues and expenses at time intervals that do not match the
receipt or payment of cash. Therefore, in applying judgment, consideration is given to AFFO (a non-GAAP measure of recurring
economic earnings used to assess distribution capacity, refer to section 10.0) and other factors when establishing distributions
to Unitholders.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
2018
2017
Distributions before distribution reinvestment - paid
Distribution reinvestment
Distributions net of distribution reinvestment - paid
Distributions per unit - paid
$
$
$
39,449 $
37,397 $
156,328 $
147,576
996
592
3,453
2,354
38,453 $
36,805 $
152,875 $
145,222
0.182 $
0.175 $
0.728 $
0.700
Distributions for the three months and year ended December 31, 2018 are higher than the same period in the prior year due to
the increase in the annual rate of distributions effective with the first distribution paid in 2018 and higher weighted average number
of units outstanding in 2018.
CT REIT’s distributions for the three months and year ended December 31, 2018 are less than the REIT’s cash generated from
operating activities, cash generated from operating activities reduced by net interest and other financing charges, and AFFO, a
non-GAAP measure which is an indicator of CT REIT's distribution capacity.
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
AFFO 1
Distributions before distribution reinvestment - paid
Excess of AFFO over distributions paid (A)
Weighted average units outstanding - diluted (non-GAAP)1(B)
Excess of AFFO over distributions paid per unit (A)/(B) 1
1 Non-GAAP measure. Refer to section 10.0 for further information.
2018
2017
2018
51,848 $
49,636 $
205,173 $
39,449
37,397
156,328
12,399 $
12,239 $
48,845 $
2017
194,371
147,576
46,795
217,107,359
213,879,775
215,040,074
211,456,486
0.057 $
0.057 $
0.227 $
0.221
$
$
$
CT REIT 2018 ANNUAL REPORT 37
MANAGEMENT'S DISCUSSION AND ANALYSIS
7.4 Book Value Per Unit
Book value per unit represents total equity from the consolidated balance sheets divided by the sum of the period end Units and
Class B LP Units outstanding. It is an indication of the residual book value available to Unitholders. As well, book value per unit
is compared to the REIT’s Unit trading price in order to measure a premium or discount.
(in thousands of Canadian dollars, except for per unit amounts)
As at
Total equity (A)
Period-end Units and Class B LP Units outstanding (B)
Book value per unit (A)/(B)
December 31, 2018
December 31, 2017
$
$
3,084,909 $
2,861,441
220,249,239
213,738,161
14.01 $
13.39
CT REIT’s book value per unit as at December 31, 2018 increased from the book value per unit as at December 31, 2017 primarily
due to net income exceeding distributions.
8.0 RELATED PARTY TRANSACTIONS
CT REIT’s controlling Unitholder is CTC, which, on December 31, 2018, held a 76.2% effective interest in the REIT, through the
ownership of 44,519,508 Units and all of the issued and outstanding Class B LP Units.
In addition to its ownership interest, CTC is CT REIT’s most significant tenant representing approximately 92.7% of the annualized
base minimum rent earned by CT REIT and occupying 94.4% of its GLA as at December 31, 2018.
In the normal course of its operations, CT REIT enters into various transactions with related parties that have been valued at
amounts agreed to between the parties and recognized in the consolidated financial statements. Investment property transactions
with CTC amounted to $68,903 (2017 - $245,126) for the year ended December 31, 2018. Refer to Note 4 to the consolidated
financial statements for additional information.
CT REIT and CTC are parties to a number of commercial agreements which govern the relationships among such parties, including
the Services Agreement and the Property Management Agreement which are described below.
Services Agreement
Under the services agreement among the Partnership and CTC entered into on October 23, 2013, ("Services Agreement"), CTC
provides the REIT with certain administrative, financial, information technology, internal audit and other support services as may
be reasonably required from time to time (the “Services”). CTC provides these Services to the REIT on a cost recovery basis
pursuant to which CT REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Services,
plus applicable taxes. The Services Agreement is automatically renewable for one year terms, unless otherwise terminated in
accordance with its terms. The Services Agreement was automatically renewed for 2019 and CTC will continue to provide such
Services on a cost recovery basis.
38 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Property Management Agreement
Under the property management Agreement, among the Partnership and CTC entities entered into on October 23, 2013, ("Property
Management Agreement") CTC provides the REIT with certain customary property management services (the ‘‘Property
Management Services’’). CTC provides these Property Management Services to the REIT on a cost recovery basis pursuant to
which the REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management
Services, plus applicable taxes. The Property Management Agreement is automatically renewable for one year terms, unless
otherwise terminated in accordance with its terms. The Property Management Agreement was automatically renewed for 2019
and CTC will continue to provide such Property Management Services on a cost recovery basis.
Refer to CT REIT’s 2018 AIF available on SEDAR at www.sedar.com for additional information on related party agreements and
arrangements with CTC.
CT REIT’s policy is to conduct all transactions and settle all balances, with related parties, on market terms and conditions. Pursuant
to the Declaration of Trust all related party transactions are subject to the approval of the independent trustees of CT REIT.
The following table summarizes CT REIT’s related party transactions as at December 31, 2018, excluding acquisition, intensification
and development activities which are contained in section 4.0:
(in thousands of Canadian dollars)
For the periods ended December 31,
Rental revenue
Property Management and Services Agreements expense
Distributions on Units
Distributions on Class B LP Units 1
Interest expense on Class C LP Units
Interest expense on the Bridge Facility
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
The net balance due to CTC is comprised of the following:
(in thousands of Canadian dollars)
As at
Tenant and other receivables
Class C LP Units
Amounts payable on Class C LP Units
Loans receivable in lieu of payments on Class C LP Units
Other liabilities
Distributions payable on Units and Class B LP Units 1
Loans receivable in lieu of distributions on Class B LP Units
Bridge Facility
Net balance due to CTC
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
$
$
$
$
$
$
$
Year Ended
2018
426,104 $
5,383 $
41,737 $
90,209 $
68,219 $
351 $
2017
408,487
5,666
41,935
84,873
68,826
126
December 31, 2018
December 31, 2017
(849) $
1,451,550
67,712
(62,027)
9,474
28,634
(18,038)
—
(1,758)
1,451,550
68,065
(62,380)
6,556
26,551
(15,460)
126,000
$
1,476,456 $
1,599,124
CT REIT 2018 ANNUAL REPORT 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
9.0 Accounting Policies and Estimates
9.1 Significant Areas of Estimation
The preparation of the consolidated financial statements requires management to apply judgments, and to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Estimates are based upon historical
experience and on various other assumptions that are reasonable under the circumstances. The result of ongoing evaluation of
these estimates forms the basis for applying judgment with regards to the carrying values of assets and liabilities and the reported
amounts of revenues and expenses. Actual results may differ from estimates. CT REIT’s critical judgments and estimates in applying
significant accounting policies are described in Note 2 of the consolidated financial statements, the most significant of which is
the fair value of investment properties.
Fair Value of Investment Properties
To determine fair value, CT REIT uses the income approach. Fair value is estimated by capitalizing the cash flows that a property
can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the
overall capitalization rate (“OCR”) method, whereby the net operating income, a non-GAAP measure, is capitalized at the requisite
OCR, or the discounted cash flow (“DCF”) method, in which the cash flows are projected over the anticipated term of the investment
plus a terminal value discounted using an appropriate discount rate. Properties Under Development are recorded at cost and are
adjusted to fair value at each balance sheet date with the fair value adjustment recognized in earnings.
9.2 Standards, Amendments and Interpretations Issued and Adopted
The following amendments have been issued and are effective for the fiscal year ended December 31, 2018, and accordingly,
have been applied in preparing these consolidated financial statements.
(i) Financial instruments
CT REIT has adopted IFRS 9 - Financial Instruments ("IFRS 9"), issued in July 2014, and the related consequential amendments
to IFRS 7 - Financial Instruments: Disclosures, with a date of initial application of January 1, 2018. IFRS 9 introduces new
requirements for 1) classification and measurement of financial assets and financial liabilities, 2) impairment for financial assets
and 3) general hedge accounting, which represent a significant change from IAS 39 - Financial Instruments: Recognition and
Measurement ("IAS 39").
IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other
comprehensive income (“FVTOCI”) and fair value through profit or loss (“FVTPL”). The classification of financial assets under IFRS
9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics.
The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale.
Cash and cash equivalents, tenant and other receivables and deposits, which were classified as loans and receivables under IAS
39, are now classified at amortized cost, because their previous category under IAS 39 was eliminated, with no change in the
40 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
carrying amounts. There were no further changes to the classification of financial asset and liabilities as a result of the adoption
of IFRS 9.
Furthermore, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new impairment
model applies to financial assets measured at amortized cost. Under IFRS 9, credit losses are recognized earlier than under IAS
39. The adoption of IFRS 9 did not result in any change to CT REIT's allowance for impairment.
CT REIT also early adopted amendments to IFRS 9 issued in October 2017 on January 1, 2018. The component of the amendments
relevant to CT REIT relates to clarifying the accounting for the modification of financial liabilities and requires CT REIT to recognize
any adjustments to the amortized cost of the financial liability arising from a modification or exchange in profit or loss at the date
of the modification or exchange, regardless of whether the changes are substantial and result in derecognition of the financial
liability. The adoption of these amendments to IFRS 9 did not have an impact on the REIT.
(ii)
Revenue from contracts with customers
The REIT has adopted IFRS 15 - Revenue from Contracts with Customers (“IFRS 15”) as issued in May 2014 with a date of initial
application of January 1, 2018. IFRS 15 outlines a single comprehensive model for entities to use in accounting for revenue arising
from contracts with customers; except for contracts that are within the scope of the standards on leases, insurance contracts, and
financial instruments. IFRS 15 also contains enhanced disclosure requirements.
The adoption of IFRS 15 did not impact the amount or timing of revenue recognized by the REIT from contracts with customers.
9.3 Standards, Amendments and Interpretations Issued but Not Yet Adopted
The following new standards, amendments and interpretations have been issued but are not effective for the fiscal year ended
December 31, 2018, and, accordingly, have not been applied in preparing these consolidated financial statements.
(i) Leases
In January 2016, the International Accounting Standards Board (“IASB”) issued IFRS 16 - Leases (“IFRS 16”), which will replace
IAS 17 - Leases (“IAS 17”) and related interpretations. IFRS 16 provides a single lessee accounting model, requiring the recognition
of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low value. IFRS 16
substantially carries forward the lessor accounting in IAS 17, with the distinction between operating leases and finance leases
being retained. CT REIT is the lessee for certain ground leases, as disclosed in Note 17 to the financial statements, which are in
scope for IFRS 16. The adoption of IFRS 16 will result in the recognition of right-of-use assets and lease liabilities of approximately
$60,000 to $70,000 associated with ground leases but is not expected to have a significant impact on CT REIT's income. CT REIT
has determined that all of the leases for which it is a lessee are investment properties. Accordingly, the right-of-use asset will be
measured at fair value and classified as investment property at the date of initial application on January 1, 2019. Lease-related
expenses previously recorded in property expense will now be recorded as fair value adjustment on investment properties and
net interest and other financing charges on the Consolidated Statements of Income and Comprehensive Income from unwinding
the discount on the lease liabilities. IFRS 16 will change the presentation of cash flows relating to leases as a lessee in CT REIT's
Consolidated Statements of Cash Flows, but does not cause a difference in the amount of cash transferred between parties of a
lease. IFRS 16 will be applied for the 2019 annual fiscal period using the modified retrospective approach and therefore CT REIT
will not be restating comparative figures.
CT REIT 2018 ANNUAL REPORT 41
MANAGEMENT'S DISCUSSION AND ANALYSIS
(ii) IASB annual improvements
In December 2017, the IASB issued amendments to four standards, including IFRS 3 - Business Combinations, IFRS 11 - Joint
Arrangements, IAS 12 - Income Taxes and IAS 23 - Borrowing Costs.
These amendments will be effective for annual periods beginning on or after January 1, 2019. The implementation of these
amendments is not expected to have a significant impact on CT REIT.
(iii) Definition of material
In October 2018, the IASB issued amendments to IAS 1 - Presentation of Financial Statements and IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, clarifying the definition of material. Under the amended definition, information is
material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that the primary users of
general purpose financial statements make on the basis of those financial statements, which provide financial information about
a specific reporting entity. The amendments also clarify the explanations accompanying the definition of material.
The amendments are effective from 1 January 2020 and are required to be applied prospectively. Early application is permitted.
The implementation of these amendments is not expected to have a significant impact on CT REIT.
(iv) Definition of business
In October 2018, the IASB issued amendments to IFRS 3 - Business Combination. The amendments narrowed and clarified the
definition of a business. The amendments will help companies determine whether an acquisition is of a business or a group of
assets. They also permit a simplified assessment of whether an acquired set of activities and assets is a group of assets rather
than a business. Distinguishing between a business and a group of assets is important because an acquirer recognizes goodwill
only when acquiring a business.
The amendments apply to transactions for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after January 1, 2020. Earlier adoption is permitted. The implementation of these amendments is not
expected to have a significant impact on CT REIT.
42 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
10.0 NON-GAAP MEASURES
CT REIT uses non-GAAP measures including NOI, same store NOI, same property NOI, FFO, FFO per unit - basic, FFO per unit
- diluted (non-GAAP), AFFO, AFFO per unit - basic, AFFO per unit - diluted (non-GAAP), AFFO payout ratio, ACFO and EBITFV.
CT REIT believes these non-GAAP measures and ratios provide useful supplemental information to both management and
investors in measuring the financial performance of CT REIT in meeting its principle objective of the creation of Unitholder value
by generating reliable, durable and growing monthly distributions. When calculating diluted FFO and AFFO per unit, management
excludes the effect of settling the Class C LP Units with Class B LP Units, which is required when calculating diluted units in
accordance with IFRS.
These measures and ratios do not have a standardized meaning prescribed by GAAP and therefore they may not be comparable
to similarly titled measures and ratios presented by other publicly traded entities, and should not be construed as an alternative
to other financial measures determined in accordance with GAAP.
10.1 Net Operating Income
CT REIT defines NOI as property revenue less property expense adjusted further for straight-line rent and land lease expense.
Management believes that NOI is a useful key indicator of performance as it represents a measure of property operations over
which management has control. NOI is also a key input in determining the value of the portfolio.
(in thousands of Canadian dollars)
For the periods ended December 31,
Property revenue
Less:
Property expense
Three Months Ended
Year Ended
2018
2017
Change
2018
2017
Change
$
119,322 $
111,264
7.2 % $
472,483 $
443,303
6.6 %
(26,804)
(23,724)
13.0 %
(108,636)
(98,290)
10.5 %
Property straight-line rent revenue
(4,535)
(5,648)
(19.7)%
(18,404)
(22,822)
(19.4)%
Add:
Straight-line ground lease expense
15
16
(6.3)%
62
62
Net operating income
$
87,998 $
81,908
7.4 % $
345,505 $
322,253
— %
7.2 %
Same Store NOI
Same store NOI is a non-GAAP financial measure which reports the period-over-period performance of the same asset base
having consistent gross leasable area in both periods. To calculate same store NOI growth, NOI is further adjusted to remove the
impact of lease cancellation fees and other non-recurring items. CT REIT management uses this measure to gauge the change
in asset productivity and asset value.
Same Property NOI
Same property NOI is a non-GAAP financial measure that is consistent with the definition of same store NOI above, except that
same property includes the NOI impact of intensifications. CT REIT management uses the measure to gauge the change in asset
productivity and asset value, as well as measure the additional return earned by incremental capital investments in existing assets.
CT REIT 2018 ANNUAL REPORT 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes the same store and same property components of NOI:
(in thousands of Canadian dollars)
For the periods ended December 31,
Same store
Intensifications
2018
2017
Same property
Acquisitions and developments
2018
2017
Net operating income
1 NM - not meaningful.
Three Months Ended
Year Ended
2018
2017 Change 1
2018
2017 Change 1
$
83,064 $
81,009
2.5% $
321,926 $
316,068
1.9%
255
—
—
—
—%
—%
776
411
—
261
$
83,319 $
81,009
2.9% $
323,113 $
316,329
1,724
2,955
—
899
—%
NM
4,795
17,597
—
5,924
$
87,998 $
81,908
7.4% $
345,505 $
322,253
—%
57.5%
2.1%
—%
NM
7.2%
10.2 Funds From Operations and Adjusted Funds From Operations
The following table reconciles GAAP net income and comprehensive income to FFO and further reconciles FFO to AFFO:
(in thousands of Canadian dollars, except per unit amounts)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017 Change
2018
2017 Change 1
Net Income and comprehensive income
$
74,501 $
97,094
(23.3)% $
300,906 $
317,277
(5.2)%
Fair value adjustment on investment property
(11,522)
(36,701)
(68.6)%
(53,628)
(79,687)
(32.7)%
Deferred taxes
Fair value adjustment of unit based compensation
(274)
(668)
(176)
55.7 %
(7)
224
NM
(1,239)
60
(33)
NM
NM
Funds from operations
$
62,037 $
60,441
2.6 % $
246,032 $
237,617
3.5 %
Property straight-line rent revenue
Straight-line ground lease expense
(4,535)
(5,648)
(19.7)%
(18,404)
(22,822)
(19.4)%
15
16
(6.3)%
62
62
— %
Normalized capital expenditure reserve
(5,669)
(5,173)
9.6 %
(22,517)
(20,486)
9.9 %
51,848 $
49,636
4.5 % $
205,173 $
194,371
5.6 %
Adjusted funds from operations
FFO per unit - basic
FFO per unit - diluted (non-GAAP) 2
AFFO per unit - basic
AFFO per unit - diluted (non-GAAP) 2
$
$
$
$
$
0.286 $
0.286 $
0.239 $
0.239 $
0.283
0.283
0.232
0.232
1.1% $
1.1% $
3.0% $
3.0% $
1.145 $
1.144 $
0.955 $
0.954 $
1.124
1.124
0.920
0.919
Weighted average units outstanding - basic
216,940,471 213,717,596
1.5% 214,805,646 211,310,245
Weighted average units outstanding - diluted (non-GAAP)
217,107,359 213,879,775
1.5% 215,040,074 211,456,486
Number of units outstanding, end of period
220,249,239 213,738,161
3.0% 220,249,239 213,738,161
1 NM - not meaningful.
2 For the purposes of calculating diluted per unit amounts, diluted units includes restricted and deferred units issued under various plans and excludes the effects of settling
the Class C LP Units with Class B LP Units.
10.2(i) Funds From Operations
FFO is a non-GAAP financial measure of operating performance used by the real estate industry, particularly by those publicly
traded entities that own and operate income-producing properties. FFO should not be considered as an alternative to net income
or cash flows provided by operating activities determined in accordance with IFRS. CT REIT calculates its FFO in accordance
44 CT REIT 2018 ANNUAL REPORT
1.9%
1.8%
3.8%
3.8%
1.7%
1.7%
3.0%
MANAGEMENT'S DISCUSSION AND ANALYSIS
with Real Property Association of Canada's ("REALPAC") "White Paper on Funds From Operations & Adjusted Funds From
Operations for IFRS" ("White Paper on FFO & AFFO") issued in February 2018 which replaced REALPAC's "White Paper on FFO"
issued in April 2014. The use of FFO, together with the required IFRS presentations, has been included for the purpose of
improving the understanding of the operating results of CT REIT.
Management believes that FFO provides an operating performance measure that, when compared period-over-period, reflects
the impact on operations of trends in occupancy levels, rental rates, operating costs and property taxes, acquisition activities and
interest costs, and provides a perspective of the financial performance that is not immediately apparent from net income determined
in accordance with IFRS.
FFO adds back to net income items that do not arise from operating activities, such as fair value adjustments. FFO, however, still
includes non-cash revenues related to accounting for straight-line rent and makes no deduction for the recurring capital expenditures
necessary to sustain the existing earnings stream.
10.2(ii) Adjusted Funds From Operations
AFFO is a non-GAAP measure of recurring economic earnings used in the real estate industry to assess an entity’s distribution
capacity. AFFO should not be considered as an alternative to net income or cash flows provided by operating activities determined
in accordance with IFRS. CT REIT calculates its AFFO in accordance with REALPAC's White Paper on FFO & AFFO.
CT REIT calculates AFFO by adjusting FFO for non-cash income and expense items such as amortization of straight-line rents.
FFO is also adjusted for a reserve for maintaining productive capacity required for sustaining property infrastructure and revenue
from real estate properties and direct leasing costs. As property capital expenditures do not occur evenly during the fiscal year or
from year to year, the normalized capital expenditure reserve in the AFFO calculation, which is used as an input in assessing a
REIT's distribution payout ratio, is intended to reflect an average annual spending level. The reserve is primarily based on a 15-
year average expenditure as initially determined by building condition reports prepared during 2013 by an independent consultant
for Canadian Tire stores and Other CTC Banners.
CT REIT 2018 ANNUAL REPORT 45
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table compares capital expenditures during the period 2015-2018 to the normalized capital expenditure reserve used
in the calculation of AFFO:
(in thousands of Canadian dollars)
For the periods indicated
2015
Q1
Q2
Q3
Q4
Year ended December 31, 2015
2016
Q1
Q2
Q3
Q4
Year ended December 31, 2016
2017
Q1
Q2
Q3
Q4
Year ended December 31, 2017
2018
Q1
Q2
Q3
Q4
Year ended December 31, 2018
Normalized
capital
expenditure
reserve
Capital
expenditures
Variance
$
$
$
$
$
$
$
$
4,168 $
1,025 $
4,230
4,327
4,352
2,834
7,384
3,591
17,077 $
14,834 $
4,407 $
259 $
4,581
4,666
4,741
4,898
8,551
1,862
18,395 $
15,570 $
5,065 $
348 $
5,109
5,139
5,173
5,445
8,307
4,862
20,486 $
18,962 $
5,598 $
(371) $
5,618
5,632
5,669
2,425
9,867
5,778
22,517 $
17,699 $
3,143
1,396
(3,057)
761
2,243
4,148
(317)
(3,885)
2,879
2,825
4,717
(336)
(3,168)
311
1,524
5,969
3,193
(4,235)
(109)
4,818
The normalized capital expenditure reserve exceeded actual capital expenditures by $11,410 during the four year period of
2015-2018. The normalized capital expenditure reserve per square foot has increased since 2013 which reflects changes in asset
mix (primarily due to an increase in multi-tenanted retail investment properties) and inflation in expected costs. Management
expects there will be periods in the future where actual capital expenditures per square foot will exceed the normalized capital
expenditure reserve per square foot rate. The current period reserve is based upon unit costs that are anticipated to be realized
in work to be completed in the current period.
The normalized capital expenditure reserve varies from the capital expenditures incurred due to the seasonal nature of the
expenditures. As such, CT REIT views the normalized capital expenditure reserve as a more meaningful measure. Refer to
section 4.11 for additional information.
46 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
10.3 AFFO Payout Ratio
The AFFO payout ratio is a non-GAAP measure of the sustainability of the REIT's distribution payout. CT REIT uses this metric
to provide transparency on performance and the overall management of the existing portfolio assets. Management considers the
AFFO payout ratio to be the best measure of the REIT's distribution capacity.
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
Change
2018
2017
Change
Distribution per unit - paid (A)
AFFO per unit - diluted (non-GAAP) 1 (B)
$
$
0.182
0.239
$
$
0.175
0.232
4.0% $
0.728
3.0% $
0.954
$
$
0.700
0.919
AFFO payout ratio (A)/(B)
76%
75%
1.3%
76%
76%
4.0%
3.8%
—%
1 For the purposes of calculating diluted per unit amounts, diluted units includes restricted and deferred units issued under various plans and excludes the effects of settling
the Class C LP Units with Class B LP Units.
10.4 Diluted Non-GAAP per Unit Calculations
Management views the diluted non-GAAP per unit measure as a meaningful measure as the full conversion of the Class C LP
Units with Class B LP Units is not considered a likely scenario. As such, management calculates the REIT's fully diluted per unit
FFO and AFFO amounts excluding the effects of settling the Class C LP Units with Class B LP Units.
The following table reconciles the calculation of the weighted average diluted units non-GAAP:
For the periods ended December 31,
2018
2017
2018
2017
Weighted average units outstanding - diluted (non-GAAP)
217,107,359
213,879,775
215,040,074
211,456,486
Dilutive effect of settling Class C LP Units with Class B LP Units
121,102,386
99,877,790
121,102,386
101,882,284
Weighted average units outstanding - diluted
338,209,745
313,757,565
336,142,460
313,338,770
Three Months Ended
Year Ended
10.5 Adjusted Cash Flow From Operations
ACFO is a non-GAAP financial measure developed by REALPAC for use by the real estate industry as a sustainable economic
cash flow metric. ACFO should not be considered as an alternative to cash flows provided by operating activities determined in
accordance with IFRS. CT REIT calculates its ACFO in accordance with REALPAC's "White Paper on Adjusted Cashflow from
Operations for IFRS" issued in February 2018. The purpose of this white paper is to provide guidance on the definition of ACFO
to promote consistent disclosure amongst reporting issuers. Management believes that the use of ACFO, combined with the
required IFRS presentations, improves the understanding of the operating cash flow of CT REIT.
CT REIT calculates ACFO from cash flow generated from operating activities by adjusting for non-operating adjustments to changes
in working capital and other, net interest and other financing charges and normalized capital expenditure reserve.
CT REIT 2018 ANNUAL REPORT 47
MANAGEMENT'S DISCUSSION AND ANALYSIS
A reconciliation from the IFRS term “Cash Generated from Operating Activities” (refer to the consolidated statements of cash flows
for the year ended December 31, 2018 and December 31, 2017) to ACFO is as follows:
(in thousands of Canadian dollars)
For the periods ended December 31,
Three Months Ended
Year Ended
2018
2017
Change
2018
2017 Change 1
Cash generated from operating activities
$
83,887 $
85,472
(1.9)% $
331,722 $
317,154
Non-operating adjustments to changes in working capital
and other
Net interest and other financing charges
Normalized capital expenditure reserve
843
(2,755)
(26,086)
(24,425)
(5,669)
(5,173)
NM
6.8 %
9.6 %
1,231
(4,567)
(104,380)
(96,378)
(22,517)
(20,486)
Adjusted cashflow from operations
$
52,975 $
53,119
(0.3)% $
206,056 $
195,723
4.6%
NM
8.3%
9.9%
5.3%
1 NM - not meaningful.
The non-operating adjustments to changes in working capital and other for three months ended December 31, 2018 is primarily
due to the timing of payment of commodity taxes payable. The non-operating adjustments to changes in working capital and other
for year ended December 31, 2018 is primarily due to an adjustment of commodity taxes charged on property tax recovery.
10.6 Earnings Before Interest and Other Financing Costs, Taxes and Fair Value Adjustments
EBITFV is a non-GAAP measure of a REIT’s operating cash flow and it is used in addition to IFRS net income because it excludes
major non-cash items (including fair value adjustments on investment properties), interest expense and other financing costs,
income tax expense, losses or gains on disposition of property, and other non-recurring items that may occur under IFRS that
management considers non-operating in nature. EBITFV should not be considered as an alternative to net income or cash flows
provided by operating activities determined in accordance with IFRS.
EBITFV is used as an input in some of CT REIT’s debt metrics, providing information with respect to certain financial ratios that
CT REIT uses in measuring its debt profile and assessing the REIT’s ability to satisfy its obligations, including servicing its debt.
For the three months and year ended December 31, 2018, EBITFV was calculated as follows:
(in thousands of Canadian dollars)
Three Months Ended
Year Ended
For the periods ended December 31,
2018
2017
Change
2018
2017
Change
Net income and comprehensive income
$
74,501 $
97,094
(23.3)% $
300,906 $
317,277
(5.2)%
Fair value adjustment on investment properties
(11,522)
(36,701)
(68.6)%
(53,628)
(79,687)
(32.7)%
Interest expense and other financing charges
26,192
24,457
7.1 %
104,605
96,543
8.4 %
Deferred taxes
EBITFV
(274)
(176)
55.7 %
(7)
60
(111.7)%
$
88,897 $
84,674
5.0 % $
351,876 $
334,193
5.3 %
48 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
10.7 Selected Quarterly Consolidated Information
(in thousands of Canadian dollars,
except per unit amounts)
As at and for the quarter ended
Q4
2018
Q3
Q2
Q1
Q4
2017
Q3
Q2
Q1
$ 119,322 $ 117,662 $ 118,880 $ 116,619 $ 111,264 $ 109,290 $ 111,609 $ 111,140
74,501 $
79,147 $
74,744 $
72,514 $
97,094 $
70,562 $
74,299 $
75,322
Property revenue
Net income
Net income per unit
- basic
- diluted
FFO per unit- diluted, non-GAAP 1
$
$
$
$
0.343 $
0.369 $
0.350 $
0.339 $
0.454 $
0.330 $
0.354 $
0.271 $
0.296 $
0.282 $
0.276 $
0.364 $
0.275 $
0.292 $
0.286 $
0.289 $
0.292 $
0.277 $
0.283 $
0.279 $
0.283 $
0.362
0.300
0.279
0.227
AFFO per unit - diluted, non-GAAP 1 $
0.239 $
0.241 $
0.241 $
0.233 $
0.232 $
0.229 $
0.231 $
Total assets
Total indebtedness
$5,708,692 $5,676,689 $5,592,575 $5,555,324 $5,455,398 $5,265,077 $5,213,930 $5,109,718
$2,573,489 $2,596,482 $2,581,316 $2,596,152 $2,544,972 $2,394,785 $2,381,895 $2,393,983
Total distributions, net of distribution
reinvestment, to Unitholders - paid
Total distributions per unit - paid
Book value per unit
Market price per unit
- high
- low
- close (end of period)
$
$
$
$
$
$
38,453 $
38,169 $
38,069 $
38,184 $
36,805 $
36,767 $
35,940 $
35,710
0.182 $
0.182 $
0.182 $
0.182 $
0.175 $
0.175 $
0.175 $
14.01 $
13.90 $
13.71 $
13.54 $
13.39 $
13.11 $
12.95 $
13.03 $
13.72 $
13.53 $
14.68 $
14.96 $
14.70 $
15.19 $
11.26 $
12.37 $
12.80 $
12.50 $
13.68 $
13.61 $
14.01 $
11.53 $
12.85 $
12.90 $
13.30 $
14.50 $
13.89 $
14.38 $
0.175
12.73
15.60
14.55
15.04
1 Non-GAAP measure. Refer to 10.0 section for further information.
Refer to CT REIT's respective annual and interim MD&A's issued for a discussion and analysis relating to those periods.
11.0 Enterprise Risk Management
Enterprise Risk Management
To preserve and enhance Unitholder value over the long term, CT REIT approaches the management of risk strategically through
its enterprise risk management program ("ERM Program"). The ERM Program provides an integrated approach to the management
of risks, through a disciplined manner that:
•
•
•
aligns key strategies, objectives and related risks;
considers all forms of risk, specifically strategic, financial and operational risks;
requires the application of risk mitigation practices which are designed to help support and optimize risk/reward related
decisions; and
•
integrates with the strategic, planning and reporting processes.
The REIT continues to further develop and refine processes and tools underlying the ERM Program.
Risk Governance
The mandate of the Board includes the responsibility to monitor the REIT’s ERM Program and oversee management’s
implementation of appropriate systems to effectively identify, manage, mitigate and monitor risks inherent in the REIT’s business
and operations. The Board has delegated primary responsibility to the Audit Committee to:
CT REIT 2018 ANNUAL REPORT 49
MANAGEMENT'S DISCUSSION AND ANALYSIS
•
consider the Principal Risks of the REIT as identified by management and ensure appropriate policies and systems have
been implemented to manage these risks;
•
review the REIT’s ERM Program, including its policies and processes with respect to risk identification, assessment, and
management of the REIT’s risks;
•
•
receive periodic reporting from the head of the risk management function; and
periodically report to the Board on any major issues arising from the ERM Program.
Principal Risks
A key element of the REIT’s ERM Program is the periodic review, identification and assessment of Principal Risks. The REIT
defines a Principal Risk as one that, alone or in combination with other interrelated risks, could have a significant adverse impact
on the REIT’s financial position, and/or ability to achieve its strategic objectives. These Principal Risks are enterprise-wide in scope
and represent strategic, financial and operational risks. Management has completed its formal annual review of its Principal Risks,
which has been presented to the Audit Committee and approved by the Board. The mitigation and management of Principal Risks
is approached holistically with a view to ensuring all risk exposures associated with a Principal Risk
are considered.
The following table provides a high-level perspective on each of the identified eight Principal Risks and describes the main strategy
that the REIT has in place to mitigate the potential impacts of these risks on its business objectives. For further disclosure of the
REIT's financial instruments, their impact on financial statements, and determination of fair value refer to Note 19 of the REIT`s
consolidated financial statements. More information on the REIT’s risk factors is presented in the REIT’s AIF.
Principal Risks
Risk Management Strategy
Marketplace
Risk due to fluctuations or fundamental changes in the external
business environment resulting in financial loss. Fluctuations or
fundamental shifts in the market place could include:
- Changes
in macroeconomic conditions (including recession,
depression, high inflation, increased unemployment, and increased
interest rates) resulting in a reduction in consumer spending;
- Changes in the competitive landscape in the retail or real estate sectors
impacting the attractiveness and the value of real estate holdings;
- Changes in the domestic or international political environments
(including new legislation) impacting the ability to do business; and
- Shifts in the demographics of the Canadian population reducing the
relevance of the products and services offered by key tenants, which
may result in a negative impact on the valuation of the REIT or the
ability to achieve its strategic objectives.
The REIT regularly monitors and analyzes external economic, political,
demographic, consumer behaviour and competitive developments in
Canada. Results are shared with the REIT executives, who are
accountable for any necessary amendments to the strategic and
operational plans and for on-going investment decisions in order to
respond to evolving market and economic trends.
50 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial
The REIT has a variety of financial risk exposures arising directly or
indirectly in the conduct of its business. Financial risks include those
related to fluctuations in capital market liquidity, interest rates, access
to capital, and the price of the REIT’s Units. Failure to develop,
implement, and execute effective strategies to monitor and manage
these risks may result in insufficient capital to absorb unexpected losses
and/or changes in asset value, negatively affecting the REIT’s financial
position and its ability to achieve its strategic objectives.
Tenant Concentration
The REIT’s revenues are dependent on the ability of its key tenant,
CTC, to meet its rent obligations and renew its tenancies. The future
financial performance and operating results of CTC’s business are
subject to inherent risks and uncertainties, such as general economic
conditions, changing consumer preferences, and other strategic,
financial, and operational risk factors. A downturn in CTC’s business
could have a material effect on the financial performance of the REIT,
its cash flows, and the ability to make distributions to Unitholders.
Significant Ownership by CTC
CTC holds the majority interest in the REIT. In situations where the
interests of CTC and the REIT are in conflict, CTC may utilize its
ownership interest in, and contractual rights with the REIT, to further
CTC’s own interest which may not be the same as the REIT’s interest
in all cases, causing the REIT not to be able to operate in a manner
that is to its favour, which could adversely affect the REIT’s cash flows,
operating results, valuation, and overall financial condition.
Operations
The risk that a direct or indirect loss may result from internal or
outsourced business activities, business disruptions, inadequate or
failed operations processes (property management, development,
redevelopment, and acquisitions), people, and systems to support the
REIT’s key business objectives. Failed processes in terms of design,
integration, and/or execution may result in incremental financial
expenditures, theft or fraud, legal or regulatory issues, and materially
adversely impact the REIT’s financial position and results of operation.
The REIT has a Board-approved financial risk management policy in
place that governs the management of capital, funding, and other
financial risks. The indebtedness and Class C LP Units of the REIT are
predominantly at fixed rates and its floating interest rate exposure is
minimal. The weighted average term to redemption/maturity of the
REIT’s debt portfolio is managed to align with or be greater than the
weighted average term to maturity of the REIT’s assets. The REIT
manages refinancing risk by maintaining a diversified debt redeeming/
maturity schedule to limit the amount of debt maturing in any one year.
The REIT may use interest rate hedges from time to time to manage
interest rate risk and to provide more certainty regarding the FFO
available to Unitholders, subject to the REIT’s investment guidelines
and operating policies.
The REIT benefits from the stability offered by CTC businesses
including Canadian Tire retail, one of Canada’s most shopped general
merchandise retailers with high recognition and a strong reputation
throughout the communities it serves. The Canadian Tire retail leases
have a weighted average lease term of 10.8 years, which provides the
REIT with reliable, durable, and growing monthly distributions.
Management regularly monitors the operating results and credit ratings
of CTC.
Appropriate governance structures, including policies, processes and
other management activities and practices are in place to maintain and
monitor the relationship between the REIT and CTC.
The REIT has appropriate governance structures, including policies,
processes, contracts, service agreements and other management
activities in place to maintain the operational performance of the REIT,
comply with legal and regulatory requirements, and to support the
REIT’s business and strategic objectives.
CT REIT 2018 ANNUAL REPORT 51
MANAGEMENT'S DISCUSSION AND ANALYSIS
Tax
Risk related to changes in income tax laws applicable to the REIT such
that the REIT would not qualify as a mutual fund trust for purposes of
the Income Tax Act ("ITA"), including the treatment of real estate
investment trusts and mutual fund trusts, or the exclusion from the
definition of "SIFT TRUST" for a trust qualifying as a "real estate
investment trust" (the "REIT Exception"), for a taxation year under the
ITA, which could have a material and adverse impact on the value of
the Units, and on distributions to Unitholders.
Management ensures that the REIT satisfies the conditions to qualify
as a closed-end mutual fund trust by complying with the restrictions in
the ITA as they are interpreted and applied by the Canada Revenue
Agency. No assurance can be given that the REIT will be able to comply
with these restrictions at all times. There can be no assurance that
income tax laws applicable to the REIT, including the treatment of real
estate investment trusts and mutual fund trusts under the ITA, will not
be changed in a manner which adversely affects the REIT or the
Unitholders.
Environmental Matters
The REIT is subject to various federal, provincial, territorial and
municipal laws relating to environmental matters. Changes in legislation
may result in the REIT bearing the risk of cost-intensive assessment,
removal of contamination, hazardous or other regulated substances
causing an adverse effect on the REIT’s financial condition, results of
operation, and cash available for distribution to Unitholders.
Financial Reporting
Risk of restatement and reissue of CT REIT’s financial statements due
to:
- Failure to adhere to financial accounting and presentation standards
and securities regulations relevant to financial reporting;
- Fraudulent activity and/or failure to maintain an effective system of
internal controls; and/or
- Inadequate explanation of the REIT's operating performance, financial
condition, and future prospects, which may result in regulatory related
issues or decrease in Unit price.
The REIT has allocated the necessary capital and operating
expenditures to comply with environmental laws and address any
material environmental issues. Additionally, the REIT has limited
environmental liability coverage under its general liability insurance
policy for third-party bodily injury and property damage claims arising
from unexpected and unintentional pollution incidents (commonly
referred to as “sudden and accidental” coverage) that are discovered
and reported quickly. It also has more extensive coverage under a
separate environmental liability insurance policy which adds coverage
for certain gradual pollution conditions and first party clean up costs.
Pursuant to the Canadian Tire Leases, CTC has indemnified the REIT
for certain environmental issues on the initial properties. Furthermore,
the REIT’s operating policy includes a Phase I environmental site
independent and experienced
assessment conducted by an
environmental consultant prior to acquiring a property.
Internal controls which include policies, processes and procedures,
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements and other
disclosure documents. This includes monitoring and responding to
changing regulations and standards governing accounting and financial
presentation.
12.0 Internal Controls and Procedures
12.1 Disclosure Controls and Procedures
Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of
financial and non-financial information regarding CT REIT. Such controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported, on a timely basis, to senior management, including the Chief
52 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), so that they can make appropriate decisions regarding public
disclosure.
CT REIT’s system of disclosure controls and procedures include, but are not limited to, its Disclosure Policy, its Code of Business
Conduct, the effective functioning of its Disclosure Committee, procedures in place to systematically identify matters warranting
consideration of disclosure by the Disclosure Committee, verification processes for individual financial and non-financial metrics,
and information contained in annual and interim filings, including the consolidated financial statements, MD&A, Annual Information
Form and other documents and external communications.
As required by CSA National Instrument 52-109 (“NI 52-109”) Certification of Disclosure in Issuers’ Annual and Interim Filings, an
evaluation of the adequacy of the design (quarterly) and effective operation (annually) of CT REIT’s disclosure controls and
procedures was conducted, under the supervision of management, including the CEO and CFO, as at December 31, 2018. The
evaluation included documentation review, enquiries and other procedures considered by management to be appropriate in the
circumstances. Based on that evaluation, the CEO and the CFO have concluded that the design and operation of the system of
disclosure controls and procedures were effective as at December 31, 2018.
12.2 Internal Control Over Financial Reporting
Management is also responsible for establishing and maintaining appropriate internal control over financial reporting. CT REIT’s
internal control over financial reporting include, but are not limited to, detailed policies and procedures related to financial accounting,
reporting and controls over systems that process and summarize transactions. CT REIT’s procedures for financial reporting also
include the active involvement of qualified financial professionals, senior management and its Audit Committee.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
As also required by NI 52-109, management, including the CEO and CFO, evaluated the adequacy of the design (quarterly) and
effective operation (annually) of CT REIT’s internal control over financial reporting as defined in NI 52-109, as at December 31,
2018. In making this assessment, management, including the CEO and CFO, used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). This evaluation included
review of the documentation of controls, evaluation of the design and testing the operating effectiveness of controls, and a conclusion
about this evaluation. Based on that evaluation, the CEO and the CFO have concluded that the design and operation of the
internal control over financial reporting were effective as at December 31, 2018, in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with
IFRS.
12.3 Changes in Internal Control Over Financial Reporting
During the quarter and year ended December 31, 2018, there have been no changes in CT REIT’s internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, CT REIT’s internal control over financial reporting.
CT REIT 2018 ANNUAL REPORT 53
MANAGEMENT'S DISCUSSION AND ANALYSIS
13.0 FORWARD-LOOKING INFORMATION
This MD&A, and the documents incorporated by reference herein, contain forward-looking statements that involve a number of
risks and uncertainties, including statements regarding the outlook for CT REIT’s business results of operations. Forward-looking
statements are provided for the purposes of providing information about CT REIT’s future outlook and anticipated events or results
and may include statements regarding known and unknown risks and uncertainties and other factors that may cause the actual
results to differ materially from those indicated. Such factors include, but are not limited to, general economic conditions, financial
position, business strategy, availability of acquisition opportunities, budgets, capital expenditures, financial results including fair
value adjustments and cash flow assumptions upon which they are based, cash, taxes, plans and objectives of or involving CT
REIT. Particularly, statements regarding future acquisitions, developments, distributions, results, performance, achievements,
prospects or opportunities for CT REIT or the real estate industry are forward-looking statements. In some cases, forward-looking
information can be identified by such terms such as “may”, “might”, “will”, “could”, “should”, “would”, “occur”, “expect”, “plan”, “anticipate”,
“believe”, “intend”, “estimate”, “predict”, “potential”, “continue”, “likely”, “schedule”, “resolved to”, or the negative thereof or other similar
expressions concerning matters that are not historical facts.
Some of the specific forward-looking statements in this document include, but are not limited to, statements with respect to the
following:
• CT REIT’s growth strategy and objectives under section 2.0;
• CT REIT's fair value of property portfolio under section 4.4;
• CT REIT's development activities under section 4.6;
• CT REIT's leasing activities under section 4.10;
• CT REIT's recoverable capital costs under section 4.11;
• CT REIT's initiative to insource certain property management and support services under section 5.1;
• CT REIT's fair value adjustment on investment properties under section 5.1;
• CT REIT's capital expenditures to fund acquisitions and development activities under section 6.1;
• CT REIT's capital strategy under section 6.11;
• CT REIT's commitments as at December 31, 2018 under section 6.12;
• CT REIT's distributions under section 7.3;
• CT REIT's capital expenditures under section 10.2(ii);
• CT REIT’s access to available sources of debt and/or equity financing;
•
the expected tax treatment of CT REIT and its distributions to Unitholders;
• CT REIT’s ability to expand its asset base, make accretive acquisitions, develop or intensify its Properties and participate
with CTC in the development or intensification of the Properties; and
•
the ability of CT REIT to continue to qualify as a “real estate investment trust”, as defined pursuant to the ITA.
54 CT REIT 2018 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
CT REIT has based these forward-looking statements on factors and assumptions about future events and financial trends that
it believes may affect its financial condition, results of operations, business strategy and financial needs, including that the Canadian
economy will remain stable over the next 12 months, that inflation will remain relatively low, that tax laws remain unchanged, that
conditions within the real estate market, including competition for acquisitions, will be consistent with the current climate, that the
Canadian capital markets will provide CT REIT with access to equity and/or debt at reasonable rates when required, that CTC
will continue its involvement with CT REIT on the basis described in its 2018 AIF, and that the ERP will be implemented and
operated as expected.
Although the forward-looking statements contained in this MD&A are based upon assumptions that management of CT REIT
believes are reasonable, based on information currently available to management, there can be no assurance that actual results
will be consistent with these forward-looking statements. Forward-looking statements necessarily involve known and unknown
risks and uncertainties, many of which are beyond the REIT’s control, that may cause CT REIT’s, or the industry’s, actual results,
performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by
such forward-looking statements. These risks and uncertainties include, among other things, the factors discussed under the “Risk
Factors” section of the 2018 AIF.
For more information on the risks, uncertainties and assumptions that could cause CT REIT’s actual results to differ from current
expectations, please also refer to CT REIT’s public filings available on SEDAR at www.sedar.com and by a link at www.ctreit.com.
CT REIT cautions that the foregoing list of important factors and assumptions is not exhaustive and other factors could also
adversely affect its results. Investors and other readers are urged to consider the foregoing risks, uncertainties, factors and
assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such forward-
looking information. Statements that include forward-looking information do not take into account the effect that transactions or
non-recurring or other special items announced or occurring after the statements are made have on CT REIT’s business. For
example, they do not include the effect of any dispositions, acquisitions, asset write-downs or other charges announced or occurring
after such statements are made. The forward-looking information in this MD&A is based on certain factors and assumptions made
as of the date hereof or the date of the relevant document incorporated herein by reference, as applicable. CT REIT does not
undertake to update the forward-looking information, whether written or oral, that may be made from time to time by it or on its
behalf, to reflect new information, future events or otherwise, except as required by applicable securities laws.
Information contained in or otherwise accessible through the websites referenced in this MD&A does not form part of this
MD&A and is not incorporated by reference into this MD&A. All references to such websites are inactive textual references and
are for information only.
CT REIT 2018 ANNUAL REPORT 55
MANAGEMENT'S DISCUSSION AND ANALYSIS
Commitment to disclosure and investor communication
The Investors section of the REIT’s website by a link at www.ctreit.com includes the following documents and information of interest
to investors:
•
Annual Information Form;
• Management Information Circular;
•
•
•
the Base Shelf Prospectus and related prospectus supplements;
quarterly reports; and
conference call webcasts (archived for one year).
Additional information about the REIT has been filed electronically with various securities regulators in Canada through SEDAR
and is available online at www.sedar.com.
If you would like to contact the Investor Relations department directly, call Marina Davies (416) 544-6134 or email
investor.relations@ctreit.com.
February 11, 2019
56 CT REIT 2018 ANNUAL REPORT
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Management's Responsibility for Financial Statements
Independent Auditor's Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Note 1 Nature of CT Real Estate Investment Trust
Note 2 Basis of Presentation
Note 3 Significant Accounting Policies
Note 4
Investment Properties
Note 5 Class C LP Units
Note 6 Mortgages Payable
Note 7 Debentures
Note 8 Credit Facilities
Note 9 Equity
Note 10 Unit Based Compensation Plans
Note 11 Non-Controlling Interests
Note 12 Revenue and Expenses
Note 13 General and Administrative Expense
Note 14 Net Interest and Other Financing Charges
Note 15 Changes in Working Capital and Other
Note 16 Segmented Information
Note 17 Commitments and Contingencies
Note 18 Related-Party Transactions
Note 19 Financial Instruments and Risk management
Note 20 Capital Management and Liquidity
Note 21 Subsequent Events
Glossary of Terms
58
59
61
62
63
64
65
65
69
74
77
78
79
79
80
83
84
84
85
86
86
86
87
87
89
91
93
94
CT REIT 2018 ANNUAL REPORT 57
Management's Responsibility for Financial Statements
The management of CT Real Estate Investment Trust ("CT REIT") is responsible for the integrity and reliability of the accompanying
consolidated financial statements. These consolidated financial statements have been prepared by management in accordance
with International Financial Reporting Standards, and include amounts based on judgments and estimates. All financial information
in our Management's Discussion and Analysis is consistent with these consolidated financial statements.
Management is responsible for establishing and maintaining adequate systems of internal control over financial reporting. These
systems are designed to provide reasonable assurance that the financial records are reliable and form a proper basis for the
timely and accurate preparation of financial statements. Management has assessed the effectiveness of CT REIT's internal
control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that CT REIT's internal control over financial
reporting was effective as at the date of these consolidated statements.
The Board of Trustees oversees management’s responsibilities for the consolidated financial statements primarily through the
activities of its Audit Committee, which is comprised solely of trustees who are neither officers nor employees of CT REIT. This
Committee meets with management and CT REIT's independent auditors, Deloitte LLP, to review the consolidated financial
statements and recommend approval to the Board of Trustees. The Audit Committee is responsible for making recommendations
to the Board of Trustees with respect to the appointment of and, subject to the approval of the Unitholders authorizing the Board
of Trustees to do so, approving the remuneration and terms of engagement of CT REIT’s auditors. The Audit Committee also
meets with the auditors, without the presence of management, to discuss the results of their audit.
The consolidated financial statements have been audited by Deloitte LLP, in accordance with Canadian generally accepted
auditing standards. Their report is presented below.
Kenneth Silver
Chief Executive Officer
February 11, 2019
Lesley Gibson
Chief Financial Officer
58 CT REIT 2018 ANNUAL REPORT
Independent Auditor's Report
To the Unitholders of CT Real Estate Investment Trust
Opinion
We have audited the consolidated financial statements of CT Real Estate Investment Trust (the “Trust”), which comprise the
consolidated balance sheets as at December 31, 2018 and 2017, and the consolidated statements of income and
comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Trust
as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance
with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Trust in accordance with the ethical requirements that are relevant
to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with
these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Other Information
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the financial statements and our auditor’s report thereon, in the CT REIT 2018 Annual
Report (the “Annual Report”)
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of
assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have
performed on this other information, we conclude that there is a material misstatement of this other information, we are
required to report that fact in this auditor’s report. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will
perform on this other information, we conclude that there is a material misstatement of this other information, we are required
to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and
for such internal control as management determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Trust’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Trust or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Trust’s financial reporting process.
CT REIT 2018 ANNUAL REPORT 59
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control.
•
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Trust’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Trust to cease to continue as a going concern.
•
Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to
bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Timothy Wilson.
/s/ Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
February 11, 2019
60 CT REIT 2018 ANNUAL REPORT
Consolidated Balance Sheets
(Canadian dollars, in thousands)
As at
Assets
Non-current assets
Investment properties
Other assets
Current assets
Tenant and other receivables
Other assets
Cash and cash equivalents
Total assets
Liabilities
Non-current liabilities
Class C LP Units
Mortgages payable
Debentures
Other liabilities
Current liabilities
Mortgages payable
Credit facilities
Other liabilities
Distributions payable
Total liabilities
Equity
Unitholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
Note December 31, 2018 December 31, 2017
4
$
5,696,194 $
5,436,597
2,801
5,698,995
2,929
5,439,526
2,145
2,561
4,991
9,697
1,966
3,004
10,902
15,872
5,708,692 $
5,455,398
1,451,550 $
1,451,550
—
1,069,844
3,348
2,524,742
37,100
14,995
33,048
13,898
99,041
2,623,783
1,306,355
1,778,554
3,084,909
43,595
869,471
3,410
2,368,026
415
179,941
32,608
12,967
225,931
2,593,957
1,168,777
1,692,664
2,861,441
5,455,398
$
$
5
6
7
6
8
9
9
9, 11
$
5,708,692 $
The related notes form an integral part of these consolidated financial statements.
David Laidley
Trustee
Anna Martini
Trustee
CT REIT 2018 ANNUAL REPORT 61
Consolidated Statements of Income and Comprehensive Income
(Canadian dollars, in thousands, except per unit amounts)
For the year ended December 31,
Note
2018
2017
Property revenue
Property expense
General and administrative expense
Net interest and other financing charges
Fair value adjustment on investment properties
Net income and comprehensive income
Net income and comprehensive income attributable to:
Unitholders
Non-controlling interests
Net income per unit - basic
Net income per unit - diluted
12
12
13
14
4
11
9
9
$
$
$
$
$
$
472,483 $
(108,636)
(12,189)
(104,380)
53,628
300,906 $
128,030 $
172,876
300,906 $
1.401 $
1.098 $
443,303
(98,290)
(11,045)
(96,378)
79,687
317,277
135,822
181,455
317,277
1.501
1.232
The related notes form an integral part of these consolidated financial statements.
62 CT REIT 2018 ANNUAL REPORT
Consolidated Statements of Changes in Equity
(Canadian dollars, in thousands)
Note
Units
Retained
Earnings
Unitholders'
Equity
Non-
controlling
interests
Total
Equity
Balance at December 31, 2017
$ 884,090 $ 284,687 $ 1,168,777 $ 1,692,664 $ 2,861,441
Net income and comprehensive income for the period
Issuance of Class B LP Units, net of issue costs
Exchange of Class B LP Units for Units
Distributions
Issuance of Units from REIT Offering, net of issue costs
Issuance of Units under Distribution Reinvestment Plan
and other
Balance at December 31, 2018
4
9
9
9
9
—
—
10,800
128,030
128,030
172,876
300,906
—
—
—
14,022
14,022
10,800
(10,800)
—
—
(67,050)
(67,050)
(90,208)
(157,258)
62,276
3,522
—
—
62,276
3,522
—
—
62,276
3,522
$ 960,688 $ 345,667 $ 1,306,355 $ 1,778,554 $ 3,084,909
Note
Units
Retained
Earnings
Unitholders'
Equity
Non-
controlling
interests
Total
Equity
Balance at December 31, 2016
$ 881,736 $ 212,471 $ 1,094,207 $ 1,496,377 $ 2,590,584
Net income and comprehensive income for the period
Issuance of Class B LP Units, net of issue costs
Distributions
Issuance of Units under Distribution Reinvestment Plan
and other
4
9
9
—
—
—
135,822
135,822
181,455
317,277
—
—
99,705
99,705
(63,606)
(63,606)
(84,873)
(148,479)
2,354
—
2,354
—
2,354
Balance at December 31, 2017
$ 884,090 $ 284,687 $ 1,168,777 $ 1,692,664 $ 2,861,441
The related notes form an integral part of these consolidated financial statements.
CT REIT 2018 ANNUAL REPORT 63
Consolidated Statements of Cash Flows
(Canadian dollars, in thousands)
For the year ended December 31,
Cash generated from (used for):
Operating activities
Net income
Add/(deduct):
Fair value adjustment on investment properties
Property straight-line rent revenue
Deferred income tax
Straight-line ground lease expense
Net interest and other financing charges
Changes in working capital and other
Cash generated from operating activities
Investing activities
Income-producing property
Development activities and land investments
Capital expenditures recoverable from tenants
Proceeds of disposition
Cash used for investing activities
Financing activities
Proceeds from REIT Offering, net
Proceeds from issuance of debentures, net
Redemption of Class C LP Units
Unit distributions
Class B LP Unit distributions paid or loaned
Payments on Class C LP Units paid or loaned
Credit facilities draws (repayments), net
Mortgage principal repayments
Mortgage borrowing
Net interest paid
Class B LP Unit issuance costs
Cash used for financing activities
Cash (used for)/generated from the period
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Note
2018
2017
4
12
15
9
7
5
5
8
6
6
$
$
$
$
$
$
300,906 $
317,277
(53,628)
(18,404)
(7)
62
104,380
(1,587)
331,722 $
(75,187)
(75,516)
(19,112)
661
(169,154) $
62,348
198,661
—
(62,985)
(89,890)
(68,219)
(164,946)
(6,915)
—
(36,501)
(32)
(168,479) $
(5,911) $
10,902
4,991 $
(79,687)
(22,822)
60
62
96,378
5,886
317,154
(172,485)
(90,196)
(16,500)
18
(279,163)
—
173,844
(23,139)
(61,029)
(84,193)
(68,947)
70,117
(17,901)
6,000
(28,026)
(184)
(33,458)
4,533
6,369
10,902
The related notes form an integral part of these consolidated financial statements.
64 CT REIT 2018 ANNUAL REPORT
Notes to the Consolidated Financial Statements
For the year ended December 31, 2018 and 2017
(All dollar amounts are in thousands, except unit and per unit amounts)
1. NATURE OF CT REAL ESTATE INVESTMENT TRUST
CT Real Estate Investment Trust is an unincorporated, closed-end real estate investment trust. CT Real Estate Investment Trust
and its subsidiaries, unless the context requires otherwise, are together referred to in these consolidated financial statements as
“CT REIT” or the "REIT". CT REIT commenced operations on October 23, 2013, and was formed to own income-producing
commercial properties located primarily in Canada. The principal and registered head office of CT REIT is located at 2180 Yonge
Street, Toronto, Ontario M4P 2V8.
Canadian Tire Corporation, Limited (“CTC”) owned a 76.2% effective interest in CT REIT as of December 31, 2018, consisting
of 44,519,508 of the issued and outstanding units of CT REIT (“Units”) and all of the issued and outstanding Class B limited
partnership units (“Class B LP Units”) of CT REIT Limited Partnership (the “Partnership”), which are economically equivalent to
and exchangeable for Units. CTC also owns all of the issued and outstanding Class C limited partnership units (“Class C LP
Units”) of the Partnership (see Note 5). The Units are listed on the Toronto Stock Exchange (the “TSX”) under the symbol CRT.UN.
2. BASIS OF PRESENTATION
(a) Fiscal year
The fiscal years for the consolidated financial statements and the notes presented for 2018 are for the years ended December 31,
2018 and 2017.
(b) Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”) using the accounting policies that are described
herein.
These consolidated financial statements were approved for issuance by CT REIT’s Board of Trustees (the “Board”), on the
recommendation of its Audit Committee, on February 11, 2019.
(c) Basis of presentation
These consolidated financial statements have been prepared on the historical cost basis except for investment properties and
liabilities for unit-based compensation plans, which are measured at fair value.
CT REIT 2018 ANNUAL REPORT 65
These financial statements are presented in Canadian dollars (“C$”), which is CT REIT's functional currency, rounded to the
nearest thousand, except per unit amounts.
(d) Critical judgments in applying significant accounting policies
The following are the critical judgments that have been made in applying CT REIT’s accounting policies and that have the most
significant effect on the amounts in the consolidated financial statements:
(i) Leases
CT REIT as a lessor
CT REIT’s policy for revenue recognition is described in Note 3(e). In applying this policy, judgments are made with
respect to whether tenant improvements provided in connection with a lease enhance the value of the leased property,
which determines whether such amounts are treated as additions to investment property as well as the point in time at
which revenue recognition under the lease commences, or constitutes a tenant incentive that is amortized as a reduction
of lease revenue over the initial term of the lease.
CT REIT also makes judgments in assessing the classification of its leases with tenants as operating leases, in particular
long-term leases in single tenant properties. CT REIT has determined that all of its leases are operating leases.
CT REIT as a lessee
Judgment is applied to determine whether a lease is classified as either a finance lease or an operating lease. A lease
that transfers substantially all the risks and rewards incidental to ownership to CT REIT is classified as a finance lease.
CT REIT does not have any finance leases.
An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating
expense in the statement of income on a straight-line basis over the lease term (see Note 17).
(ii) Investment properties
CT REIT applies judgment in determining whether the properties it acquires are considered to be asset acquisitions or
business combinations. CT REIT considers all properties acquired to date to be asset acquisitions.
Judgment is applied in determining whether certain costs are additions to the carrying amount of the investment property.
CT REIT had obtained independent appraisals such that substantially all of its properties were externally appraised over
a four-year period. CT REIT modified its use of independent appraisals in Q4 2018. The scope of properties subject to
external appraisals over the four year cycle changed from 100% to approximately 80% of the portfolio's IFRS fair value
by excluding any single tenant asset that has a fair value, in management’s estimation, below a certain threshold.
(iii) Income taxes
CT REIT makes judgments that, with the exception of transactions involving CT REIT GP Corp. ( the "GP"), deferred
income taxes are not recognized in CT REIT’s financial statements on the basis that CT REIT can deduct distributions
paid such that its liability for income taxes is substantially reduced or eliminated for the period, and CT REIT intends to
66 CT REIT 2018 ANNUAL REPORT
continue to distribute its taxable income and continue to qualify as a real estate investment trust for the foreseeable
future.
(iv) Consolidation of the Partnership
CT REIT makes judgments in the application of IFRS 10 - Consolidated Financial Statements in its assessment of control
over the Partnership, including the purpose for which the Partnership was created, the power to direct the relevant
activities of the Partnership, its exposure or rights to the variable returns of the Partnership and its ability to use its power
to affect its returns.
(v) Proportionate consolidation of interest in Canada Square
CT REIT makes judgments in the application of IFRS 11 - Joint Arrangements in its assessment of joint control over the
interest held in Canada Square, a mixed-use commercial property in Toronto, Ontario (the “Co-Ownership”), and its rights
to the assets and obligations for the liabilities related to the Co-Ownership.
(e) Critical accounting estimates and assumptions
CT REIT makes estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent
assets and liabilities, and the reported amount of earnings for the period. Actual results may differ from estimates. The estimates
and assumptions underlying the valuation of investment properties, as set out in Note 4, are considered critical.
(f) Standards, amendments and interpretations issued and adopted
The following amendments have been issued and are effective for the fiscal year ended December 31, 2018, and accordingly,
have been applied in preparing these consolidated financial statements.
(i) Financial instruments
CT REIT has adopted IFRS 9 - Financial Instruments ("IFRS 9"), issued in July 2014, and the related consequential
amendments to IFRS 7 - Financial Instruments: Disclosures, with a date of initial application of January 1, 2018. IFRS
9 introduced new requirements for 1) classification and measurement of financial assets and financial liabilities, 2)
impairment for financial assets and 3) general hedge accounting, which represent a significant change from IAS 39 -
Financial Instruments: Recognition and Measurement ("IAS 39").
IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value
through other comprehensive income (“FVTOCI”) and fair value through profit or loss (“FVTPL”). The classification of
financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its
contractual cash flow characteristics.
The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale.
Cash and cash equivalents, tenant and other receivables and deposits, which were classified as loans and receivables
under IAS 39, are now classified at amortized cost, because their previous category under IAS 39 was eliminated, with
no change in the carrying amounts. There were no further changes to the classification of financial asset and liabilities
as a result of the adoption of IFRS 9.
CT REIT 2018 ANNUAL REPORT 67
Furthermore, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new
impairment model applies to financial assets measured at amortized cost. Under IFRS 9, credit losses are recognized
earlier than under IAS 39. The adoption of IFRS 9 did not result in any change to CT REIT's allowance for impairment.
CT REIT also early adopted amendments to IFRS 9 issued in October 2017 on January 1, 2018. The component of the
amendments relevant to CT REIT relates to clarifying the accounting for the modification of financial liabilities and
requires CT REIT to recognize any adjustments to the amortized cost of the financial liability arising from a modification
or exchange in profit or loss at the date of the modification or exchange, regardless of whether the changes are substantial
and result in derecognition of the financial liability. The adoption of these amendments to IFRS 9 did not have an impact
on the REIT.
(ii) Revenue from contracts with customers
The REIT has adopted IFRS 15 - Revenue from Contracts with Customers (“IFRS 15”) as issued in May 2014 with a
date of initial application of January 1, 2018. IFRS 15 outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers; except for contracts that are within the scope of the
standards on leases, insurance contracts, and financial instruments. IFRS 15 also contains enhanced disclosure
requirements.
The adoption of IFRS 15 did not impact the amount or timing of revenue recognized by the REIT from contracts with
customers.
(g) Standards, amendments and interpretations issued but not yet adopted
The following new standards, amendments and interpretations have been issued but are not effective for the fiscal year ended
December 31, 2018, and accordingly, have not been applied in preparing these consolidated financial statements.
(i) Leases
In January 2016, the International Accounting Standards Board (“IASB”) issued IFRS 16 - Leases (“IFRS 16”), which
will replace IAS 17 - Leases (“IAS 17”) and related interpretations. IFRS 16 provides a single lessee accounting model,
requiring the recognition of assets and liabilities for all leases, unless the lease term is 12 months or less or the underlying
asset has a low value. IFRS 16 substantially carries forward the lessor accounting in IAS 17, with the distinction between
operating leases and finance leases being retained. CT REIT is the lessee for certain ground leases, as disclosed in
Note 17 to the financial statements, which are in scope for IFRS 16. The adoption of IFRS 16 will result in the recognition
of right-of-use assets and lease liabilities of approximately $60,000 to $70,000 associated with ground leases but is
not expected to have a significant impact on CT REIT's income. CT REIT has determined that all of the leases for which
it is a lessee are investment properties. Accordingly, the right-of-use asset will be measured at fair value and classified
as investment property at the date of initial application on January 1, 2019. Lease-related expenses previously recorded
in property expense will now be recorded as fair value adjustment on investment properties and net interest and other
financing charges on the Consolidated Statements of Income and Comprehensive Income from unwinding the discount
on the lease liabilities. IFRS 16 will change the presentation of cash flows relating to leases as a lessee in CT REIT's
Consolidated Statements of Cash Flows, but does not cause a difference in the amount of cash transferred between
68 CT REIT 2018 ANNUAL REPORT
parties of a lease. IFRS 16 will be applied for the 2019 annual fiscal period using the modified retrospective approach
and therefore CT REIT will not be restating comparative figures.
(ii) IASB annual improvements
In December 2017, the IASB issued amendments to four standards, including IFRS 3 - Business Combinations, IFRS
11 - Joint Arrangements, IAS 12 - Income Taxes and IAS 23 - Borrowing Costs.
These amendments will be effective for annual periods beginning on or after January 1, 2019. The implementation of
these amendments is not expected to have a significant impact on CT REIT.
(iii) Definition of material
In October 2018, the IASB issued amendments to IAS 1 - Presentation of Financial Statements and IAS - 8 Accounting
Policies, Changes in Accounting Estimates and Errors, clarifying the definition of material. Under the amended definition,
information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions
that the primary users of general purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity. The amendments also clarify the explanations
accompanying the definition of material.
The amendments are effective from January 1, 2020 and are required to be applied prospectively. Early application is
permitted. The implementation of these amendments is not expected to have a significant impact on CT REIT.
(iv) Definition of business
In October 2018, the IASB issued amendments to IFRS 3 - Business Combination. The amendments narrowed and
clarified the definition of a business. The amendments will help companies determine whether an acquisition is of a
business or a group of assets. They also permit a simplified assessment of whether an acquired set of activities and
assets is a group of assets rather than a business. Distinguishing between a business and a group of assets is important
because an acquirer recognizes goodwill only when acquiring a business.
The amendments apply to transactions for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2020. Earlier adoption is permitted. The implementation of these
amendments is not expected to have a significant impact on CT REIT.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements, except as noted below.
(a) Basis of consolidation
These consolidated financial statements include the accounts of CT REIT and its consolidated subsidiaries consisting of the
Partnership and the GP, which are the entities over which CT REIT has control. Control exists when CT REIT has the ability to
CT REIT 2018 ANNUAL REPORT 69
direct the relevant activities of an entity, has exposure or rights to variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the entity. CT REIT reassesses whether or not it controls an entity if facts and
circumstances indicate that there are changes to one or more of the three elements of control.
Consolidation of a subsidiary begins when CT REIT obtains control over the subsidiary and ceases when CT REIT loses control
of the subsidiary. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between
CT REIT and its subsidiaries, and among subsidiaries of CT REIT, are eliminated on consolidation.
Net income and comprehensive income are attributed to the Unitholders of CT REIT and to the non-controlling interest even if
this results in the non-controlling interest having a deficit balance.
CT REIT holds all of the Class A limited partnership units (“Class A LP Units”) of the Partnership, which are the sole class of
Partnership units that carry voting rights. In addition, CT REIT holds all of the shares of the GP, the general partner of the
Partnership, which has the power to direct the relevant activities of the Partnership. Accordingly, CT REIT is exposed to variable
returns from its interest in the Partnership and has the ability to direct the relevant activities thereof to affect its returns. Therefore
CT REIT consolidates the Partnership.
Non-controlling interests in the equity of the Partnership, which consists of Class B LP Units held by a wholly owned subsidiary
of CTC, are shown separately in equity on the consolidated balance sheet.
(b) Joint arrangements
A joint arrangement is an arrangement in which two or more parties have joint control. Joint control is the contractually agreed
sharing of control whereby decisions about relevant activities require unanimous consent of the parties sharing control. A joint
arrangement is classified as a joint operation when the parties that have joint control of the arrangement have rights to the assets
and obligations for the liabilities related to the arrangement. A joint arrangement is classified as a joint venture when the parties
that have joint control of the arrangement have rights to the net assets of the arrangement. A party to a joint operation records
its interest in the assets, liabilities, revenue and expenses of the joint operation.
CT REIT acquired a one-third interest in a co-ownership, pursuant to a co-ownership arrangement. The co-ownership is a joint
arrangement as the material decisions about relevant activities require unanimous consent of the co-owners. This joint
arrangement is a joint operation as each co-owner has rights to the assets and obligations for the liabilities related to the Co-
ownership. Accordingly, CT REIT recognizes its proportionate share of the assets, liabilities, revenue and expenses of the Co-
Ownership in its financial statements.
(c) Investment properties
Investment properties include income-producing properties and properties under development that are held by CT REIT to earn
rental income. CT REIT accounts for its investment properties in accordance with IAS 40 - Investment Property (‘‘IAS 40’’). For
acquired investment properties that meet the definition of a business, the acquisition is accounted for as a business combination
in accordance with IFRS 3 - Business Combinations (‘‘IFRS 3’’), otherwise they are initially measured at cost including directly
attributable acquisition costs. Subsequent to acquisition, investment properties are carried at fair value, which is determined based
on available market evidence at the balance sheet date including, among other things, rental revenue from current leases and
70 CT REIT 2018 ANNUAL REPORT
reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume about rental revenue
from future leases less future cash outflows in respect of capital expenditures. Gains and losses arising from changes in fair value
are recognized in net income in the period of change.
The initial cost of properties under development includes the acquisition cost of the properties, direct development costs, realty
taxes and borrowing costs attributable to properties under development. Borrowing costs associated with direct expenditures on
properties under development are capitalized. The amount of capitalized borrowing costs is determined first by reference to
property-specific borrowings, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible
expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with
specific developments, the amount capitalized is the gross cost incurred on those borrowings less any investment income arising
on their temporary investment. Borrowing costs are capitalized from the commencement of the development until the date of
practical completion. The capitalization of borrowing costs is suspended if there are prolonged periods when development activity
is interrupted. Practical completion is when the property is capable of operating in the manner intended by management. Generally,
this occurs on completion of construction and receipt of all necessary occupancy and other material permits.
If considered reliably measurable, properties under development are carried at fair value. Properties under development are
measured at cost if fair value is not reliably measurable. In determining the fair value of properties under development, management
considers, among other things, the development risk of the property, the provisions of the construction contract, the stage of
completion and the level of reliability of cash inflows after completion.
Leasing costs incurred by CT REIT in negotiating and arranging tenant leases are added to the carrying amount of investment
properties. Payments to tenants under lease contracts are characterized as either capital expenditures in the form of tenant
improvements that enhance the value of the property or as lease inducements. Tenant improvements are capitalized as part of
investment properties. Lease inducements are capitalized as a component of investment properties and are amortized over the
term of the lease as a reduction of revenue.
When an investment property is sold, the gain or loss is determined as the difference between the net disposal proceeds and the
carrying amount of the property, and is recognized in net income in the period of disposal.
(d) Business combinations
CT REIT accounts for investment property acquisitions as a business combination if the particular assets and set of activities
acquired can be operated and managed as a business in its current state. CT REIT applies the acquisition method to account for
business combinations. The consideration transferred for a business combination is the fair value of the assets transferred, the
liabilities assumed from or incurred to the former owners of the acquiree and the equity interests issued by CT REIT. The total
consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable
assets acquired as well as liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date. Acquisition related costs incurred in a business combination are expensed as incurred.
CT REIT recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at
the non-controlling interest’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets.
CT REIT 2018 ANNUAL REPORT 71
(e) Revenue recognition
CT REIT has retained substantially all of the risks and benefits of ownership of its investment properties and therefore accounts
for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to
use the leased asset. Generally, this occurs on the lease inception date or, where CT REIT is required to make additions to the
property in the form of tenant improvements that enhance the value of the property, upon substantial completion of those
improvements. Property revenue includes all amounts earned from tenants related to lease agreements including property tax,
operating cost and other recoveries.
The total amount of minimum lease payments to be received from operating leases is recognized on a straight-line basis over the
term of the lease. A straight-line rent receivable, which is included in the carrying amount of investment properties, is recorded
for the difference between the rental revenue recorded and the contractual amount of minimum base rent received or receivable.
(f)
Income taxes
CT REIT is a “mutual fund trust” under the Income Tax Act (Canada). The Trustees intend to distribute or designate all taxable
income directly earned by CT REIT to Unitholders and to deduct such distributions for income tax purposes.
Legislation relating to the federal income taxation of Specified Investment Flow Through (“SIFT”) trusts or partnerships provide
that certain distributions from a SIFT will not be deductible in computing the SIFT’s taxable income and that the SIFT will be
subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian
corporations. However, distributions paid by a SIFT as a return of capital should generally not be subject to tax.
Under the SIFT rules, the taxation regime will not apply to a real estate investment trust that meets prescribed conditions relating
to the nature of its assets and revenue (the “REIT Exception”). CT REIT has reviewed the SIFT rules and has assessed their
interpretation and application to CT REIT’s assets and revenue. While there are uncertainties in the interpretation and application
of the SIFT rules, CT REIT believes that it meets the REIT Exception. Accordingly, with the exception of transactions with the GP,
no net current income tax expense or deferred income tax assets or liabilities have been recorded in the consolidated financial
statements.
(g) Class C LP Units
Each series of the Class C LP Units are redeemable, at the option of the holder, at a specified future date and can be settled at
the option of the Partnership in cash or a variable number of Class B LP Units. Accordingly, the Class C LP Units are classified
as financial liabilities and fixed payments on the Class C LP Units are presented as interest expense in the consolidated statement
of income and comprehensive income using the effective interest method.
(h) Non-controlling interests
Class B LP Units are classified as non-controlling interests and are presented as a component of equity as they represent equity
interests in the Partnership not attributable, directly or indirectly, to CT REIT.
(i) Provisions
A provision is a liability of uncertain timing or amount. Provisions are recognized when CT REIT has a present legal or constructive
obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the
72 CT REIT 2018 ANNUAL REPORT
amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present
value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the obligation. Provisions are remeasured at each balance sheet
date using the then current discount rate. The increase in the provision due to the passage of time is recognized as interest
expense.
(j) Unit based compensation plans
CT REIT offers a Deferred Unit Plan (the “DU Plan”) for trustees who are not employees or officers of CT REIT or its affiliates,
whereby such trustees may elect to receive all or a portion of their annual compensation in deferred units (“DUs”). CT REIT has
a Restricted Unit Plan (the “RU Plan”) for executives, whereby the executives of CT REIT may be issued discretionary grants or
may elect to receive all or a portion of their annual short-term incentive plan awards in restricted units (“RUs”), and a Performance
Unit Plan (the “PU Plan”) whereby the performance units (“PUs”) are granted to employees of CT REIT as part of their long-term
incentive plan.
DUs, RUs and PUs are recorded as liabilities and expensed as compensation expense over the vesting period. Accrued
compensation costs under the plans are adjusted to the fair value of the vested units at each reporting date.
(k) Cash and cash equivalents
Cash and cash equivalents include cash and short-term investments with original maturities of three months or less.
(l) Financial instruments and derivatives
The accounting policies applied from January 1, 2018 onwards are in compliance with IFRS 9. The policies applied under the
previous accounting standard (IAS 39) were applied in the accounting for the comparative period results.
As a result of adopting IFRS 9, the REIT updated its accounting policies for the recognition, classification and impairment of
financial instruments, which are as follows:
Recognition and initial measurement - Financial assets and financial liabilities are recognized in the consolidated balance sheets
when the REIT becomes a party to the contractual provisions of a financial instrument or non-financial derivative contract. All
financial instruments are measured at fair value on initial recognition.
Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than
financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition.
Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized
immediately in net income.
Classification and subsequent measurement - The REIT classifies financial assets, at the time of initial recognition, according to
the REIT’s business model for managing the financial assets and the contractual terms of the cash flows.
Financial assets are subsequently measured at amortized cost if both of the following conditions are met and they are not designated
as at FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual
CT REIT 2018 ANNUAL REPORT 73
cash flows; and b) the contractual terms of the financial asset give rise to cash flows on specified dates that are solely payments
of principal and interest on the principal amount outstanding. These assets are subsequently measured at amortized cost using
the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset
is derecognized or impaired.
Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses
recognized in net income in the period that the liability is derecognized.
The REIT measures all financial instruments at amortized cost, except for liabilities for unit based compensation plans which are
included in other liabilities and carried at fair value.
Impairment of financial instruments - The REIT recognizes a loss allowance on a forward looking basis at an amount equal to the
lifetime ECL on its financial assets measured at amortized cost. Lifetime ECL represents the expected credit losses that will result
from all possible default events over the expected life of a financial instrument.
4.
INVESTMENT PROPERTIES
The following table summarizes CT REIT's investment property portfolio holdings:
December 31, 2018
December 31, 2017
Income-
producing
properties
Properties
Under
Development
Total
investment
properties
Income-
producing
properties
Properties
Under
Development
Total
investment
properties
Balance, beginning of period
$
5,337,515 $
99,082 $
5,436,597 $
4,979,231 $
21,124 $
5,000,355
209,677
—
209,677
Property acquisitions (including
transaction costs)
Intensifications
Developments
Development land
Capitalized interest and property taxes
89,429
—
—
—
—
—
18,625
47,079
12,642
2,752
89,429
18,625
47,079
12,642
2,752
—
—
—
—
24,893
64,882
13,380
1,957
Transfers
52,947
(52,947)
—
27,154
(27,154)
Fair value adjustment on investment
properties
Straight-line rent
Recoverable capital expenditures
Dispositions
53,628
18,404
17,699
(661)
—
—
—
—
53,628
18,404
17,699
79,687
22,822
18,962
(661)
(18)
—
—
—
—
24,893
64,882
13,380
1,957
—
79,687
22,822
18,962
(18)
Balance, end of period 1
$
5,568,961 $
127,233 $
5,696,194 $
5,337,515 $
99,082 $
5,436,597
1 Includes purchased lands for $13,911 (December 31, 2017 - $9,209) held for development.
To determine fair value, CT REIT uses the income approach. Fair value is estimated by capitalizing the cash flows that the property
can reasonably be expected to produce over its remaining economic life. The income approach is derived from two methods: the
overall capitalization rate (“OCR”) method, whereby the net operating income is capitalized at the requisite OCR, or the discounted
cash flow (“DCF”) method, in which the cash flows are projected over the anticipated term of the investment plus a terminal value
discounted using an appropriate discount rate.
74 CT REIT 2018 ANNUAL REPORT
As at December 31, 2018, management’s determination of fair value was updated for current market assumptions, informed by
market capitalization rates provided by independent appraisal professionals.
CT REIT had obtained independent appraisals such that substantially all of its properties were externally appraised over a four-
year period. CT REIT modified its use of independent appraisals in Q4 2018. The scope of properties subject to external appraisals
over the four year cycle changed from 100% to approximately 80% of the portfolio's IFRS fair value by excluding any single tenant
asset that has a fair value, in management’s estimation, below a certain threshold.
The fair value of investment properties is based on Level 3 inputs (see Note 19(a) for definition of levels). There have been no
transfers between levels during the period.
The significant inputs used to determine the fair value of CT REIT’s income-producing properties are as follows:
Number of properties
Value at December 31, 2018
Discount rate
Terminal capitalization rate
Overall capitalization rate
Hold period (years)
Properties valued by the
OCR method
Properties valued by the
DCF method
280
62
$
4,149,740
$
1,546,453
—%
—%
6.17%
—
6.95%
6.54%
—%
10
Valuations determined by the OCR method are most sensitive to changes in capitalization rates. Valuations determined by the
DCF method are most sensitive to changes in discount rates.
The following table summarizes the sensitivity of the fair value of income-producing properties to changes in the capitalization
rate and discount rate, respectively:
Rate sensitivity
+ 75 basis points
+ 50 basis points
+ 25 basis points
December 31, 2018
- 25 basis points
- 50 basis points
- 75 basis points
OCR Sensitivity
DCF Sensitivity
Fair value
Change in fair
value
Fair value
Change in fair
value
$
$
$
3,712,280 $
(437,460) $
1,398,562 $
3,846,909
3,992,329
(302,831)
(157,411)
1,444,392
1,493,710
4,149,740 $
— $
1,546,453 $
4,320,812
4,507,235
171,072
357,495
1,604,561
1,667,187
4,711,459 $
561,719 $
1,735,399 $
(147,891)
(102,061)
(52,743)
—
58,107
120,734
188,946
CT REIT 2018 ANNUAL REPORT 75
2018 Investment and Development Activity
Funding of investment and development activities for the year ended December 31, 2018 was as follows:
YTD 2018 Investment and Development Activity
Funded with working capital to CTC
Funded with working capital to third parties
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Total costs
$
$
2017 Investment and Development Activity
Property
investments
7,258 $
68,181
—
13,990
Development
land Developments
8,546 $
30,155 $
Intensifications
4,096
—
—
16,860
2,752
64
8,890 $
9,735
—
—
Total
54,849
98,872
2,752
14,054
89,429 $
12,642 $
49,831 $
18,625 $
170,527
Funding of investment and development activities for the year ended December 31, 2017 was as follows:
YTD 2017 Investment and Development Activity
Funded with working capital to CTC
$
28,800 $
Property
investments
Development
land Developments
6,640 $
14,623 $
Intensifications
Funded with working capital to third parties
Funded with Bridge Facility
Capitalized interest and property taxes
Issuance of Class B LP Units to CTC
Mortgages payable
Total costs
40,907
102,382
—
37,588
—
4,980
—
—
1,760
—
7,566
23,618
1,957
13,075
6,000
$
209,677 $
13,380 $
66,839 $
24,893 $
314,789
16,453 $
8,253
—
—
187
—
Total
66,516
61,706
126,000
1,957
52,610
6,000
Included in CT REIT's portfolio are 10 (2017 – nine) properties which are situated on ground leases with remaining initial terms
of up to 37 years (December 31, 2017 – up to 38 years), and an average remaining initial term of 14 years (December 31, 2017
– 16 years).
76 CT REIT 2018 ANNUAL REPORT
5. CLASS C LP UNITS
The Class C LP Units entitle the holder to a fixed cumulative monthly payment, during the initial fixed rate period for each Series
of Class C LP Units (the “Initial Fixed Rate Period”), equal to a weighted average rate of 4.70% of the aggregate capital amount
ascribed to the Class C LP Units, in priority to distributions made to holders of the Class B LP Units and the GP shares, subject
to certain exceptions.
On expiry of the Initial Fixed Rate Period applicable to each series of Class C LP Units, and each five-year period thereafter,
each such series of Class C LP Units is redeemable at par (together with all accrued and unpaid payments thereon) at the option
of the Partnership or the holder, upon giving at least 120 days’ prior notice. The Partnership further has the ability to settle any
of the Class C LP Units at any time after January 1, 2019 at a price equal to the greater of par and a price to provide a yield equal
to the then equivalent Government of Canada bond yield plus a spread, so long as such redemption is in connection with a sale
of properties.
Such redemptions of Class C LP Units (other than upon a change of control of CT REIT) can be settled at the option of the
Partnership, in cash or Class B LP Units of equal value.
During the five-year period beginning immediately following the completion of the Initial Fixed Rate Period, and each five-year
period thereafter, if not redeemed, the fixed payment rate for Class C LP Units will be reset, and the holders of Class C LP Units
will be entitled, subject to certain conditions, to elect either a fixed rate or floating rate option.
The following table presents the details of the Class C LP Units:
Series
Series 3
Series 4
Series 5
Series 6
Series 7
Series 8
Series 9
Series 16
Series 17
Series 18
Series 19
Expiry of Initial
Fixed Rate Period
Annual
distribution rate
during Initial
Fixed Rate Period
Carrying amount
at December 31,
2018
Carrying amount
at December 31,
2017
May 31, 2020
May 31, 2024
May 31, 2028
May 31, 2031
May 31, 2034
May 31, 2035
May 31, 2038
May 31, 2020
May 31, 2020
May 31, 2020
May 31, 2020
4.50% $
200,000 $
4.50%
4.50%
5.00%
5.00%
5.00%
5.00%
2.42%
2.39%
2.28%
2.28%
200,000
200,000
200,000
200,000
200,000
200,000
16,550
18,500
4,900
11,600
200,000
200,000
200,000
200,000
200,000
200,000
200,000
16,550
18,500
4,900
11,600
Weighted average / Total
4.70% $
1,451,550 $
1,451,550
Current
Non-current
Total
$
$
— $
1,451,550
1,451,550 $
—
1,451,550
1,451,550
CT REIT 2018 ANNUAL REPORT 77
For the year ended December 31, 2018, interest expense of $68,219 (2017 - $68,826) was recognized in respect of the Class C
LP Units (see Note 14). The holders of the Class C LP Units may elect to defer receipt of all or a portion of distributions declared
by CT REIT until the first business day following the end of the fiscal year. If the holder so elects to defer receipt of payments,
CT REIT will loan the holder an amount equal to the deferred payment without interest, and the loan will be due and payable in
full on the first business day following the end of the fiscal year in which the loan was advanced, the holder having irrevocably
directed that any payment of the deferred payments be applied to repay such loans. At the election of the holder, payments on
the Class C LP Units for the year ended December 31, 2018 of $62,027 (2017 – $62,380), were deferred until the first business
day following the end of the fiscal year and non-interest bearing loans equal to the deferred payments were advanced in lieu
thereof. The net amount of payments due in respect of the Class C LP Units at December 31, 2018 of $5,685 (2017 – $5,685)
is included in other liabilities on the consolidated balance sheets. The loans deferred as at December 31, 2018 were settled on
January 2, 2019.
6. MORTGAGES PAYABLE
Mortgages payable, secured by certain CT REIT investment properties, include the following:
Current
Non-current
Total
Future repayments are as follows:
2019
Total contractual obligation
Unamortized transaction costs
December 31, 2018
December 31, 2017
Face
value
Carrying
amount
Face
value
$
$
37,133 $
37,100 $
422 $
—
—
43,626
37,133 $
37,100 $
44,048 $
Principal
amortization
—
Maturities
37,133
$
— $
37,133 $
Carrying
amount
415
43,595
44,010
Total
37,133
37,133
(33)
$
37,100
Mortgages payable at December 31, 2018 had a weighted average interest rate of 3.81% (December 31, 2017 – 3.07%) and a
maturity date of December 2019. At December 31, 2018, floating rate and fixed rate mortgages were $37,133 (December 31,
2017 – $37,133) and $0 (December 31, 2017 – $6,915), respectively.
Investment properties having a fair value of $77,050 (December 31, 2017 – $95,704) have been pledged as security for mortgages
payable.
78 CT REIT 2018 ANNUAL REPORT
7. DEBENTURES
Series
A, 2.85%, June 9, 2022
B, 3.53%, June 9, 2025
C, 2.16%, June 1, 2021
D, 3.29%, June 1, 2026
E, 3.47%, June 16, 2027
F, 3.87%, December 7, 2027
December 31, 2018
December 31, 2017
Face value
Carrying
amount
Face value
$
150,000 $
149,475 $
150,000 $
200,000
150,000
200,000
175,000
200,000
198,949
149,577
198,995
174,036
198,812
200,000
150,000
200,000
175,000
—
Carrying
amount
149,277
198,739
149,270
198,717
173,468
—
$
1,075,000 $
1,069,844 $
875,000 $
869,471
Debentures as at December 31, 2018, had a weighted average interest rate of 3.25% (December 31, 2017 – 3.11%).
On February 7, 2018 CT REIT issued $200,000 aggregate principal amount of senior unsecured debentures, with an interest rate
of 3.87%.
For the year ended December 31, 2018, amortization of the transaction costs of $1,043 (December 31, 2017 – $756) are included
in net interest and other financing charges on the consolidated statements of income and comprehensive income (see Note 14).
8. CREDIT FACILITIES
CT REIT's credit facilities are comprised of the following:
Bank Credit Facility
Bridge Facility
(a) Bank Credit Facility
December 31, 2018 December 31, 2017
$
$
14,995 $
—
14,995 $
53,941
126,000
179,941
CT REIT has a $300,000 unsecured revolving credit facility with a syndicate of major Canadian third party banks ("Bank Credit
Facility") available until December 2023. The Bank Credit Facility bears interest at a rate based on the bank’s prime rate of interest
or bankers’ acceptances plus a margin. A standby fee is charged on the Bank Credit Facility.
As at December 31, 2018, $14,995 (December 31, 2017 – $53,941) of borrowings were drawn on the Bank Credit Facility and
$2,372 (December 31, 2017 – $2,065) of letters of credit were outstanding under the Bank Credit Facility. At December 31, 2018,
borrowings under the Bank Credit Facility had a weighted average interest rate of 3.46% (December 31, 2017 – 2.33%).
CT REIT 2018 ANNUAL REPORT 79
(b) Bridge Facility
In December 2017, CT REIT entered into a loan agreement with CTC ("Bridge Facility") solely for the purpose of facilitating the
acquisition of a portfolio of certain investment properties. The Bridge Facility was repaid in Q1 2018 and was not available to CT
REIT at December 31, 2018.
As at December 31, 2018, $nil (December 31, 2017 – $126,000) borrowings were drawn on the Bridge Facility.
9. EQUITY
Authorized and outstanding units
CT REIT is authorized to issue an unlimited number of Units.
On November 28, 2018, CT REIT completed a joint equity offering of an aggregate of 21,115,000 Units comprised of the
issuance of 5,179,000 Units from treasury for net proceeds of $62,276 after deducting issuance costs of $2,720 (the “REIT
Offering”) and the sale of 15,936,000 Units by CTC (the “Secondary Offering” and, together with the REIT Offering, referred to
as the “Equity Offering”). In connection with the Secondary Offering, CTC exchanged 744,414 Class B LP Units for 744,414
Units, in accordance with the terms of the Class B LP Units, which were then sold pursuant to the Secondary Offering.
The following tables summarize the changes in Units and Class B LP Units:
Units
90,645,295
279,897
5,179,000
744,414
As at December 31, 2018
Class B LP
Units
123,092,866
1,052,181
—
(744,414)
Total
213,738,161
1,332,078
5,179,000
—
96,848,606
123,400,633
220,249,239
Units
90,479,102
As at December 31, 2017
Class B LP
Units
116,367,697
Total
206,846,799
166,193
6,725,169
6,891,362
90,645,295
123,092,866
213,738,161
Total outstanding at beginning of year
Issued
REIT Offering
Exchange of Class B LP Units for Units
Total outstanding at end of year
Total outstanding at beginning of year
Issued
Total outstanding at end of year
80 CT REIT 2018 ANNUAL REPORT
Net income attributable to Unitholders and weighted average units outstanding used in determining basic and diluted net income
per unit for the year ended December 31, 2018 and 2017, are calculated as follows, respectively:
For the Year ended December 31, 2018
Net income attributable to Unitholders - basic
$
128,030 $
172,876 $
Units
Class B LP
Units
Net income attributable to Unitholders - basic
$
135,822 $
181,455 $
Units
Class B LP
Units
Income effect of settling Class C LP Units with Class B LP Units
Net income attributable to Unitholders - diluted
Weighted average units outstanding - basic
Dilutive effect of other Unit plans
Dilutive effect of settling Class C LP Units with Class B LP Units
Weighted average units outstanding - diluted
Income effect of settling Class C LP Units with Class B LP Units
Net income attributable to Unitholders - diluted
Weighted average units outstanding - basic
Dilutive effect of other Unit plans
Dilutive effect of settling Class C LP Units with Class B LP Units
Weighted average units outstanding - diluted
Distributions on Units and Class B LP Units
91,326,658
123,478,988
214,805,646
234,427
121,102,386
336,142,459
For the Year ended December 31, 2017
Total
300,906
68,219
369,125
Total
317,277
68,826
386,103
$
$
90,561,829
120,748,416
211,310,245
146,241
101,882,284
313,338,770
The following table presents total distributions paid on Units and Class B LP Units:
For the year ended December 31,
Units
Class B LP Unit
2018
2017
Distributions
per unit
Distributions
per unit
$
$
0.728 $
0.728 $
0.700
0.700
On November 5, 2018, the Board reviewed and approved the current rate of distribution of $0.728 per Unit per year and approved
an increase in the annual rate of distribution to $0.757 per Unit per year, or monthly distribution rate of $0.0631 per Unit, when
declared, commencing with the December 31, 2018 record date.
On December 14, 2018, CT REIT's Board declared a distribution of $0.0631 per Unit paid on January 15, 2019 to holders of Units
and Class B LP Units of record as of December 31, 2018.
CT REIT 2018 ANNUAL REPORT 81
On January 15, 2019, CT REIT’s Board declared a distribution of $0.0631 per Unit payable on February 15, 2019 to holders of
Units and Class B LP Units of record as of January 31, 2019.
Units
Each Unit is transferable and represents an equal, undivided, beneficial interest in CT REIT and any distributions from the REIT,
whether of net income, net realized capital gains, or other amounts, and in the event of the termination or winding-up of CT REIT,
in CT REIT’s net assets remaining after satisfaction of all liabilities. All Units rank among themselves equally and ratably without
discrimination, preference or priority. Each Unit entitles the holder thereof to one vote at all meetings of Unitholders or with respect
to any written resolution of Unitholders. The Units have no conversion, retraction or redemption rights.
Non-controlling interests
The Class B LP Units are exchangeable on a one-for-one basis (subject to customary anti-dilution provisions) for Units at the
option of the holder. Each Class B LP Unit is accompanied by a Special Voting Unit. The holders of Class B LP Units are entitled
to receive distributions when declared by the Partnership equal to the per Unit amount of distributions payable to each holder of
Units. However, the Class B LP Units have limited voting rights over the Partnership.
Special Voting Units
Special Voting Units are only issued (i) in tandem with Class B LP Units of the Partnership or (ii) in limited circumstances to
holders of the Class C LP Units and are not transferable separately from the Class B LP Units or Class C LP Units, as the case
may be, to which they relate. Upon any transfer of Class B LP Units or Class C LP Units, as the case may be, such Special
Voting Units will automatically be transferred to the transferee of the Class B LP Units. As Class B LP Units are exchanged for
Units or purchased for cancellation, the corresponding Special Voting Units will be cancelled for no consideration.
Each Special Voting Unit entitles the holder thereof to one vote at all meetings of Unitholders or with respect to any resolution in
writing of Unitholders. Except for the right to attend and vote at meetings of the Unitholders or with respect to written resolutions
of the Unitholders, Special Voting Units do not confer upon the holders thereof any other rights. A Special Voting Unit does not
entitle its holder to any economic interest in CT REIT, or to any interest or share in CT REIT, or to any interest in any distributions
(whether of net income, net realized capital gains, or other amounts), or to any interest in any net assets in the event of termination
or winding-up.
CT REIT’s Board retains full discretion with respect to the timing and quantum of distributions. Declared distributions are paid to
Unitholders of record at the close of business on the last day of the month on or about the 15th day of the following month.
82 CT REIT 2018 ANNUAL REPORT
10. UNIT BASED COMPENSATION PLANS
Deferred Unit Plan for Trustees
CT REIT offers a Deferred Unit ("DU") Plan for members of its Board who are not also employees or officers of the REIT or CTC.
Under this plan, eligible trustees may elect to receive all or a portion of their annual trustee fees in DUs. DUs are paid out in
equivalent Units of CT REIT or, at the election of the trustee, in cash, following the trustee's departure from the Board.
As at December 31, 2018, accrued DU compensation costs, which are included in other liabilities, totaled $1,384 (2017 – $1,515).
Compensation expense recorded related to DU's for the year ended December 31, 2018 was $(386) (2017 - $15). The fair value
of DUs is equal to the trading price of Units, which is a Level 1 input (see Note 19(a)).
Performance Unit Plan for Employees
CT REIT offers Performance Units ("PUs") to certain employees that generally vest after three years. Each PU entitles the employee
to receive a cash payment equal to the fair market value of Units of CT REIT, multiplied by a factor determined by specific
performance-based criteria, as set out in the Performance Unit Plan.
As at December 31, 2018, accrued PU compensation costs, which are included in other liabilities, totaled $2,030 (2017 - $2,290).
Compensation expense recorded for the year ended December 31, 2018 for PUs granted to employees was $1,027 (2017 - $1,309).
The fair value of PUs is equal to the trading price of Units, which is a Level 1 input (see Note 19(a)).
Restricted Unit Plan for Executives
CT REIT offers a Restricted Unit ("RU") Plan for its executives. RUs may be issued as discretionary grants or executives may
elect to receive all or a portion of their short term incentive plan in RUs. At the end of the vesting period which is generally three
years from the date of grant (in the case of discretionary grants) or five years from the short term incentive plan bonus payment
date (in the case of deferred bonus grants), the executives will receive an equivalent number of Units issued by CT REIT or, at
the executive's election, the cash equivalent thereof.
As at December 31, 2018, accrued RU compensation costs, which are included in other liabilities, totaled $1,150 (2017 - $867).
Compensation expense for the year ended December 31, 2018 was $282 (2017 - $34). The fair value of RUs is equal to the
trading price of Units, which is a Level 1 input (see Note 19(a)).
CT REIT 2018 ANNUAL REPORT 83
11. NON-CONTROLLING INTERESTS
Details of non-wholly owned subsidiaries of CT REIT that have material non-controlling interests are as follows:
Proportion of ownership interests held
by non-controlling interests
Net income and comprehensive income
allocated to non-controlling interests
Name of Subsidiary
CT REIT Limited Partnership
56.03%
57.59% $
172,876 $
181,455
As at
December 31, 2018
As at
December 31, 2017
For the year ended
December 31, 2018
For the year ended
December 31, 2017
There are no restrictions on CT REIT’s ability to access or use the assets and settle the liabilities of its subsidiaries and there are
no contractual arrangements that could require CT REIT to provide financial support to its subsidiaries.
12. REVENUE AND EXPENSES
(a) Property revenue
CT REIT leases income-producing commercial properties to tenants under operating leases. The CTC leases have staggered
initial terms ranging from one to 20 years, with a weighted average remaining initial term of approximately 11 years. Annual base
minimum rent for CTC leases have weighted average annual rent escalations of approximately 1.5% per year.
The components of property revenue are as follows:
Base minimum rent
Straight-line rent
Subtotal base rent
Property operating expense recoveries
Capital expenditure and interest recovery charge
Other revenues
Property revenue
CTC
316,342 $
18,298
334,640 $
84,347
7,110
7
Other
For the Year ended
December 31, 2018
30,312 $
106
30,418 $
15,553
102
306
346,654
18,404
365,058
99,900
7,212
313
426,104 $
46,379 $
472,483
$
$
$
84 CT REIT 2018 ANNUAL REPORT
Base minimum rent
Straight-line rent
Subtotal base rent
Property operating expense recoveries
Capital expenditure and interest recovery charge
Other revenues
Property revenue
CTC
300,724 $
21,945
322,669 $
80,331
5,483
4
$
$
Other
23,286
877
24,163
10,045
79
529
408,487 $
34,816
$
For the Year ended
December 31, 2017
324,010
22,822
346,832
90,376
5,562
533
443,303
$
$
$
Future base minimum rental revenue commitments on non-cancellable tenant operating leases are as follows:
Less than one year
Between one and five years
More than five years
Total
(b) Property expense
December 31, 2018
$
$
346,544
1,385,403
2,221,715
3,953,662
The major components of property expense consist of property taxes and other recoverable operating costs:
For the year ended December 31,
Property taxes
Other recoverable operating costs
Property management 1
Ground rent
Property expense
1 Includes $2,038 (2017 - $2,652) payable to CTC. See Note 18.
13. GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is comprised of the following:
For the year ended December 31,
Personnel expense 1
Services Agreement with CTC 2
Public entity and other 1
General and administrative expense
$
$
$
$
2018
86,643 $
13,360
4,583
4,050
108,636 $
2018
6,233 $
3,345
2,611
12,189 $
2017
79,987
9,787
4,479
4,037
98,290
2017
5,291
3,014
2,740
11,045
1 Includes unit-based awards, including reduction in expense as a result of the change in the fair market value of the Units of $1,239 (2017 - $33) for the year ended December 31, 2018.
2 See Note 18.
CT REIT 2018 ANNUAL REPORT 85
14. NET INTEREST AND OTHER FINANCING CHARGES
Net interest and other financing charges are comprised of the following:
For the year ended December 31,
Interest on Class C LP Units 1
Interest and financing costs - debentures
Interest and financing costs - Bank Credit Facility
Interest on mortgages payable
Interest costs - Bridge Facility 1
Less: capitalized interest
Interest and other financing charges less capitalized interest
Less: interest income
Net interest and other financing charges
1 Paid or payable to CTC.
15. CHANGES IN WORKING CAPITAL AND OTHER
Changes in working capital are comprised of the following:
For the year ended December 31,
Changes in working capital and other
Tenant and other receivables
Other assets
Other liabilities
Other
Changes in working capital and other
16. SEGMENTED INFORMATION
$
$
$
$
$
$
2018
68,219 $
35,187
1,561
1,532
351
106,850 $
(2,245)
104,605 $
(225)
104,380 $
2018
(179) $
230
(1,115)
(523)
(1,587) $
2017
68,826
25,207
1,972
1,777
126
97,908
(1,365)
96,543
(165)
96,378
2017
441
(112)
5,688
(131)
5,886
CT REIT has one segment for financial reporting purposes which comprises the ownership and operation of primarily retail
investment properties located across Canada.
86 CT REIT 2018 ANNUAL REPORT
17. COMMITMENTS AND CONTINGENCIES
CT REIT has agreed to indemnify, in certain circumstances, the trustees and officers of CT REIT and its subsidiaries.
As at December 31, 2018, CT REIT had obligations of $129,163 (December 31, 2017 – $39,227) in future payments for the
completion of developments. Included in the commitments is $123,057 due to CTC.
Operating ground lease commitments
CT REIT has entered into various ground leases with third parties, which are accounted for as operating leases. The remaining
non-cancellable initial terms of the ground leases are up to 37 years, with an average remaining initial term of 14 years. The
majority of the ground lease agreements are renewable at the end of the current lease term. Assuming all extensions are exercised,
the ground leases have remaining terms up to 72 years with an average remaining lease term of 37 years.
The ground rent expense charged to the statement of income and comprehensive income during the year is disclosed in Note
12.
The future aggregate minimum ground lease payments under the non-cancellable operating leases terms are as follows:
Less than one year
Between one and five years
More than five years
Total
18. RELATED-PARTY TRANSACTIONS
December 31, 2018 December 31, 2017
$
$
3,487 $
11,901
28,373
43,761 $
3,704
12,864
30,625
47,193
In the normal course of operations, CT REIT enters into various transactions with related parties that have been measured at
amounts agreed to between the parties and are recognized in the consolidated financial statements.
(a) Arrangements with CTC
Services Agreement
Under the services agreement among the Partnership and CTC entered into on October 23, 2013, ("Services Agreement"), CTC
provides the REIT with certain administrative, financial, information technology, internal audit and other support services as may
be reasonably required from time to time (the “Services”). CTC provides these Services to the REIT on a cost recovery basis
pursuant to which CT REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Services,
plus applicable taxes. The Services Agreement is automatically renewable for one year terms, unless otherwise terminated in
accordance with its terms. The Services Agreement was automatically renewed for 2019 and CTC will continue to provide such
Services on a cost recovery basis.
CT REIT 2018 ANNUAL REPORT 87
Property Management Agreement
Under the property management Agreement, among the Partnership and CTC entities entered into on October 23, 2013, ("Property
Management Agreement") CTC provides the REIT with certain customary property management services (the ‘‘Property
Management Services’’). CTC provides these Property Management Services to the REIT on a cost recovery basis pursuant to
which the REIT reimburses CTC for all costs and expenses incurred by CTC in connection with providing the Property Management
Services, plus applicable taxes. The Property Management Agreement is automatically renewable for one year terms, unless
otherwise terminated in accordance with its terms. The Property Management Agreement was automatically renewed for 2019
and CTC will continue to provide such Property Management Services on a cost recovery basis.
(b) Transactions and balances with related parties
Transactions with CTC are comprised of the following, excluding acquisition, intensification and development activities with CTC
which are contained in Note 4:
For the year ended December 31,
Rental revenue
Property Management and Services Agreement expense
Distributions on Units
Distributions on Class B LP Units 1
Interest expense on Class C LP Units
Interest expense on the Bridge Facility
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
The net balance due to CTC is comprised of the following:
As at
Tenant and other receivables
Class C LP Units
Amounts payable on Class C LP Units
Loans receivable in lieu of payments on Class C LP Units
Other liabilities
Distributions payable on Units and Class B LP Units 1
Loans receivable in lieu of distributions on Class B LP Units
Bridge Facility
Net balance due to CTC
1 Includes distributions deferred at the election of the holders of the Class B LP Units.
Note
12
14
14
$
$
$
$
$
$
2018
426,104 $
5,383 $
41,737 $
90,209 $
68,219 $
351 $
2017
408,487
5,666
41,935
84,873
68,826
126
December 31, 2018 December 31, 2017
$
(849) $
1,451,550
67,712
(62,027)
9,474
28,634
(18,038)
—
(1,758)
1,451,550
68,065
(62,380)
6,556
26,551
(15,460)
126,000
$
1,476,456 $
1,599,124
(c) Compensation of executives and independent trustees
The remuneration of the chief executive officer, chief financial officer, senior vice president and the trustees who were not employees
or officers of the REIT or any of its affiliates, is as follows:
88 CT REIT 2018 ANNUAL REPORT
For the year ended December 31,
Salaries and short-term employee benefits
Unit-based awards 1
Total
2018
2,975 $
491
3,466 $
2017
2,588
1,067
3,655
$
1 Unit-based awards, as described in Note 10, includes reduction in expense as a result of the change in the fair market value of the Units of $1,239 (2017 - $33).
The remuneration of the chief executive officer, chief financial officer and senior vice president consist principally of base salary,
short-term cash incentives and long-term incentives (in the form of unit-based awards). The remuneration is determined by CT
REIT’s Board of Trustees, on the recommendation of the Governance, Compensation and Nominating Committee.
The compensation of trustees, who are not employees or officers of CT REIT or any of its affiliates, consists of an annual retainer
and meeting fees.
19. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
(a) Fair value of financial instruments
For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the
inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety,
which are described as follows:
•
Level 1 inputs: Are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access
at the measurement date;
•
Level 2 inputs: Are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability,
either directly or indirectly; and
•
Level 3 inputs: Are unobservable inputs for the asset or liability.
The fair value of the Class C LP Units is determined by discounting contractual principal and interest payments at estimated
current market interest rates for the instrument. Current market interest rates are determined with reference to current benchmark
rates for a similar term and current credit spreads for debt with similar terms and risks.
The fair value of the Class C LP Units, debentures and mortgages payable at December 31, 2018, is $1,480,510, $1,043,218 and
$37,381 respectively. The fair value measurement of the Class C LP Units and mortgages payable is based on Level 2 inputs.
The significant inputs used to determine the fair value of the Class C LP Units and mortgages payable are interest rates, term to
maturity, and credit spreads. The debentures are actively traded on the secondary market and the fair value is determined using
Level 1 inputs. There have been no transfers during the period between levels.
Financial assets consist of cash and cash equivalents, tenant and other receivables and deposits which are classified at amortized
cost. Financial liabilities, other than those discussed in the preceding paragraph, consist of other liabilities, Bank Credit Facility,
Bridge Facility and distributions payable, which are carried at amortized cost, except for liabilities for unit based compensation
CT REIT 2018 ANNUAL REPORT 89
plans which are included in other liabilities and are carried at fair value, equivalent to the trading price of Units, which is a Level
1 input. The carrying amounts of the liabilities for the unit based compensation plans approximate their fair value due to their
short-term nature.
(b) Financial risk management
In the normal course of business, CT REIT has exposure to risks from its use of financial instruments. CT REIT is exposed to
liquidity and credit risk in connection with its financial instruments. Financial risk management policies are established for CT
REIT to identify and analyze the risks faced by CT REIT, to set acceptable risk tolerance limits and controls and to monitor risks
and adherence to limits. CT REIT is not exposed to significant currency or market risk arising from financial instruments.
Additionally, CT REIT’s exposure to interest rate changes is limited as a significant portion of its indebtedness is at fixed interest
rates. Exposure to interest rate changes is dependent on the extent to which CT REIT has short term borrowings under its credit
facilities, any new debt is issued or assumed on acquisitions, new series of Class C LP Units are issued to finance future real
estate transactions or any existing Class C LP Units being re-priced or redeemed, as all are market dependent (see Note 5).
Liquidity risk
Liquidity risk is the risk that CT REIT will encounter difficulty in meeting the obligations associated with its financial liabilities that
are settled by delivering cash or another financial asset. CT REIT’s approach to managing liquidity is to ensure that it has sufficient
liquidity available through cash, assets readily convertible to cash and committed bank lines of credit to support its monthly cash
distributions to Unitholders, meet operating and strategic plan requirements and meet unexpected financial challenges. CT REIT
has in place a leverage and liquidity policy to manage its exposure to liquidity risk.
Management has identified key financial credit metric ratios and calculates these ratios in a manner to approximate the methodology
of debt rating agencies. Management monitors these metrics against industry-accepted targets to maintain investment-grade
ratings from two credit rating agencies.
CT REIT uses a detailed consolidated cash flow forecast model to regularly monitor its near-term and longer-term cash flow
requirements, which assists in optimizing its cash distributions to Unitholders and evaluating longer-term funding strategies.
CT REIT has access to the following financing sources to ensure that the appropriate level of liquidity is available to meet its
monthly distributions and strategic objectives: committed Bank Credit Facility totaling $300,000, direct access to debt and equity
markets subject to consent from CTC, and contributions from CTC to the extent cash flows from property operations are not
sufficient.
Credit risk
Credit risk is the risk of financial loss if a counterparty to a financial instrument fails to meet its contractual obligations and arises
principally from CT REIT’s tenants and from investment securities counterparties. Credit risk arises from the possibility that CT
REIT’s tenants may experience financial difficulty and be unable to meet their lease obligations. CTC is CT REIT’s most significant
tenant and will be for the foreseeable future with Canadian Tire retail stores and distribution centres. CT REIT’s revenues will be
dependent on the ability of CTC to meet its rent obligations and CT REIT’s ability to collect rent from CTC.
90 CT REIT 2018 ANNUAL REPORT
CT REIT has a Financial Risk Management Board Policy in place for management of counterparty risk related to investing activity.
The overall credit risk compliance mechanisms established in this policy include credit rating requirements, approval authorities,
counterparty limits, notional limits, term to maturity and portfolio diversification requirements. CT REIT limits its exposure to credit
risk by investing only in highly liquid and rated term deposits, bankers’ acceptances or other approved securities and only with
highly rated financial institutions and government counterparties.
Interest rate risk
Interest rate risk is the potential for financial loss arising from increases in interest rates. CT REIT has minimal exposure to interest
rate changes as the initial rate on the Class C LP Units, debentures and certain mortgages payable are at fixed interest rates and
CT REIT currently has $14,995 (2017 - $179,941) in short-term borrowings outstanding under its credit facilities.
20. CAPITAL MANAGEMENT AND LIQUIDITY
CT REIT’s objectives when managing capital are to ensure access to capital and sufficient liquidity is available to support ongoing
property operations, developments and acquisitions while generating reliable, durable and growing monthly cash distributions on
a tax-efficient basis to maximize long-term Unitholder value.
The definition of capital varies from entity to entity, industry to industry and for different purposes. CT REIT’s strategy and process
for managing capital is driven by requirements established under its Declaration of Trust and the trust indenture dated June 9,
2015, as supplemented by supplemental indentures (collectively, the Trust Indenture), pursuant to which the debentures were
issued, and the Bank Credit Facility.
The following schedule details the capitalization of CT REIT:
As at
Liabilities
Class C LP Units
Mortgages payable
Debentures
Credit facilities
Equity
Unitholders' equity
Non-controlling interests
Total
December 31, 2018 December 31, 2017
$
1,451,550 $
1,451,550
37,100
1,069,844
14,995
1,306,355
1,778,554
$
5,658,398 $
44,010
869,471
179,941
1,168,777
1,692,664
5,406,413
CT REIT’s Class C LP Units have a fixed, cumulative, preferential cash distribution, if, as and when declared by the board of
directors of the GP.
Under the Declaration of Trust, the Trust Indenture, and the credit facilities, key financial covenants are reviewed on an ongoing
basis by management to monitor compliance with the agreements. The key financial covenants for CT REIT are as follows:
CT REIT 2018 ANNUAL REPORT 91
•
a requirement to maintain, at all times:
a specified maximum ratio of total indebtedness of CT REIT (plus the aggregate par value of the Class C LP
Units) to gross book value of assets
a specified maximum ratio of total secured indebtedness of CT REIT (plus the aggregate par value of the Class
C LP Units) to gross book value of assets
a minimum Unitholders’ equity
a ratio of unencumbered assets to unconsolidated unsecured indebtedness
a specified minimum debt service coverage ratio defined as earnings before interest and taxes as a percentage
of interest expense, which for greater clarity includes payments on the Class C LP Units
As at December 31, 2018, CT REIT was in compliance with all of its financial covenants. Under these financial covenants, CT
REIT has sufficient flexibility to fund business growth and maintain or amend distribution rates within its existing distribution policy.
CT REIT’s strategy is to satisfy its liquidity needs using cash flows generated from operating activities and cash provided by
financing activities. Rental income, recoveries from tenants, interest and other income, draws on the Bank Credit Facility and
further issuance of debt and equity are CT REIT’s principal sources of liquidity used to pay operating expenses, distributions,
debt service, and recurring capital and leasing costs in its investment property portfolio.
The principal liquidity needs for periods beyond the next year are for Unit distributions, redemptions of Class C LP Units upon
scheduled expiry of the Initial Fixed Rate Period and capital expenditures. CT REIT’s strategy is to meet these needs through
cash flows generated from operating activities and further issuance of debt and equity.
The following table presents the contractual maturities of CT REIT’s financial liabilities:
Payments Due by Period
Class C LP Units 1
Debentures
Payments on Class C LP Units 1
Interest on debentures
Credit facilities 2
Mortgages payable
Other liabilities
Distributions payable 3
Payable on Class C LP Units, net
of loans receivable
Interest on Bank Credit Facility
Interest on mortgages payable
Total
2019
2020
2021
$ 1,451,550 $
— $
251,550 $
— $
2022
—
2023
2024 and
thereafter
— $ 1,200,000
1,075,000
784,644
239,427
14,995
37,133
28,303
13,898
5,685
2,465
1,430
—
68,219
34,949
—
37,133
24,955
13,898
5,685
519
1,430
—
150,000
150,000
—
775,000
62,258
34,949
—
—
3,348
—
—
519
—
58,000
33,330
58,000
29,572
—
—
—
—
—
519
—
—
—
—
—
—
519
—
58,000
27,433
14,995
—
—
—
—
389
—
480,167
79,194
—
—
—
—
—
—
—
TOTAL
$ 3,654,530 $
186,788 $
352,624 $
241,849 $
238,091 $
100,817 $ 2,534,361
1 Assume redemption on Initial Fixed Rate Period for each series.
2 The Bank Credit Facility matures in December 2023. However, the borrowings drawn against the Bank Credit Facility as at December 31, 2018 of $14,995 is classified as a current liability
as management expects to repay this amount within the next twelve months.
3 On Units and Class B LP Units.
92 CT REIT 2018 ANNUAL REPORT
21. SUBSEQUENT EVENTS
On February 8, 2019, CT REIT completed a $19,925 acquisition, from a third party, of a single tenant property with a Canadian
Tire store located in Canmore, Alberta.
CT REIT 2018 ANNUAL REPORT 93
GLOSSARY OF TERMS
Glossary of Terms
“AFFO” is a non-GAAP financial measure and has the meaning given to that term in Real Property Association of Canada’s white
paper titled “White Paper on Funds From Operations & Adjusted Funds from Operations for IFRS” (the “White Paper on FFO &
AFFO”) issued in February 2017. It is calculated as FFO subject to certain adjustments to remove the impact of recognizing property
rental revenues or expenses on a straight-line basis, and the deduction of a reserve for normalized maintenance capital
expenditures, tenant inducements and leasing commissions
“Atlantic Canada” means the provinces of New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island.
“Board” means the Board of Trustees of the REIT.
“Change of Control” means the acquisition by a person, or group of persons acting jointly or in concert, directly or indirectly, other
than CTC or any of its Subsidiaries, of more than 50% of the aggregate voting rights attached to the Units and Special Voting
Units of the REIT (taking into account (i) full dilution from the exchange of all then-outstanding Class B LP Units into Units of the
REIT; and (ii) in respect of any other securities that are convertible or exchangeable into Units of the REIT, only dilution resulting
from the conversion or exercise of such other convertible or exchangeable securities held by such person or group of persons).
“Class A LP Units” means, collectively, the Class A limited partnership units of the Partnership. “Class A LP Unit” means any
one of them.
“Class B LP Units” means, collectively, the Class B limited partnership units of the Partnership, and “Class B LP Unit” means
any one of them.
“Class C LP Units” means, collectively, the Class C limited partnership units of the Partnership, and “Class C LP Unit” means
any one of them.
“Competitor” means a person who carries on business, or any person who controls or is controlled by such person, in one or
more of the following categories: hardware, automotive, sporting goods, apparel and housewares.
“CTC” means Canadian Tire Corporation, Limited together with its Subsidiaries (excluding the REIT and the REIT’s Subsidiaries),
or, as the context requires, any of them.
“CTC Banner” means a CTC name or trademark, including the Canadian Tire, Mark’s and FGL banners stores, including Sport
Chek, Sports Experts and Atmosphere, names or trademarks.
“CTREL” means Canadian Tire Real Estate Limited, a wholly-owned Subsidiary of CTC.
“Development Agreement” means the development agreement among the REIT, the Partnership, CTREL and CTC entered into
on October 23, 2013, as further described under “Arrangements with CTC - Commercial Agreements with CTC - Development
Agreement” of the AIF.
94 CT REIT 2018 ANNUAL REPORT
GLOSSARY OF TERMS
“EBITFV” is a non-GAAP measure of operating cash flow. It is calculated as net income in accordance with GAAP, adjusted by
removing the impact of; (i) non-cash adjustments including fair value adjustments on investment properties; (ii) interest expense
and other financing costs; (iii) income tax expense; (iv) gains or losses the sale of investment properties; and (v) non-recurring
items that may occur under IFRS.
“FFO” is a non-GAAP financial measure and has the meaning given to it in the White Paper on FFO & AFFO. It is calculated as
net income in accordance with GAAP, adjusted by removing the impact of: (i) fair value adjustments on investment properties; (ii)
other fair value adjustments; (iii) gains and losses on the sale of investment properties; (iv) change in fair value of non-cash
compensation incentive plans; and (v) amortization of tenant incentives.
“GAAP” means generally accepted accounting principles in Canada (which for Canadian reporting issuers is IFRS) as in effect
from time to time and as adopted by the REIT from time to time for the purposes of its public financial reporting.
“GLA” means gross leasable area.
“Gross Book Value” means at any time the total assets of the REIT as shown in its then most recent consolidated balance sheet.
“IFRS” means International Financial Reporting Standards as issued by the International Accounting Standards Board and as
adopted by the Chartered Professional Accountants of Canada in Part I of The CPA Canada Handbook - Accounting, as amended
from time to time.
“Initial Public Offering” means the distribution to the public of Units pursuant to the REIT’s final prospectus dated October 10,
2013, which closed on October 23, 2013.
“Intensification” means the development of a property, site or area at a higher density than currently exists, through development,
redevelopment, infill and expansion or conversion of existing buildings.
“Investment Properties” means the portfolio of properties owned by CT REIT.
“NOI” means property revenue less property expense and is further adjusted for straight-line rent and land lease adjustments.
“Property Management Agreement” means the property management agreement among the Partnership, CTC and CTREL
entered into on October 23, 2013, as further described under “Arrangements with CTC - Commercial Agreements with CTC -
Property Management Agreement” of the AIF.
“REIT Exception” means the exclusion from the definition of “SIFT trust” in the Tax Act for a trust qualifying as a “real estate
investment trust” under the Tax Act.
“ROFO Agreement” means the right of first offer agreement among the REIT, the Partnership and CTC entered into on October
23, 2013, as described under “Arrangements with CTC - Commercial Agreements with CTC” of the AIF.
CT REIT 2018 ANNUAL REPORT 95
GLOSSARY OF TERMS
“Services Agreement” means the services agreement among the REIT, the Partnership and CTC entered into on October 23,
2013 pursuant to which CTC or certain of its Subsidiaries provide the Services, as further described under “Arrangements with
CTC - Commercial Agreements with CTC - Services Agreement” of the AIF.
“SIFT Rules” means the specified investment flow-through rules applicable to SIFT trusts and SIFT partnerships in the Tax Act.
“Special Voting Units” means special voting units of the REIT, and “Special Voting Unit” means any one of them.
“Unitholders” means holders of Units, and “Unitholder” means any one of them.
“Units” means trust units in the capital of the REIT, other than Special Voting Units, and “Unit” means any one of them.
“Western Canada” means the provinces of British Columbia, Alberta, Saskatchewan and Manitoba, and the Northwest Territories
and Yukon Territory.
96 CT REIT 2018 ANNUAL REPORT
CT Real Estate Investment Trust
2180 Yonge Street, P.O. Box 770, Station K
Toronto, Ontario, Canada M4P 2V8
Visit our website at
ctreit.com